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Central Bank Independence, Democracy, and Dollarization

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Abstract

Is there a fundamental conflict between insulating monetary policy from popular pressures, seen as essential to sound monetary policy, and making policy responsive to the popular will, seen as fundamental to democracy? We argue that strongly independent monetary policy is not inconsistent with democratic control of policymaking, once one realizes that a key feature of democratic policymaking is the decision to remove some decisions from “day-to-day” political pressures. This is the essence of "constitutionalism," central to the functioning of democracy, by which certain decisions are made difficult to reverse. It is further argued that a conflict between popular sovereignty and policymaker independence is not unique to monetary policy, but actually characterizes most policymaking in a democracy, with institutions designed to insulate policymaking from popular pressures. A constitutional perspective implies that extreme forms of commitment, such as a dollarization, are similarly consistent with democracy. One argument for such constraints on monetary policy (as opposed to fiscal policy, for example) is agreement on what good monetary policy means.

Suggested Citation

  • Allan Drazen, 2002. "Central Bank Independence, Democracy, and Dollarization," Journal of Applied Economics, Universidad del CEMA, vol. 5, pages 1-17, May.
  • Handle: RePEc:cem:jaecon:v:5:y:2002:n:1:p:1-17
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    References listed on IDEAS

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    Cited by:

    1. Salma Hadj Fraj & Mekki Hamdaoui & Samir Maktouf, 2018. "Governance and economic growth: The role of the exchange rate regime," International Economics, CEPII research center, issue 156, pages 326-364.
    2. Donato Masciandaro, 2021. "Central Bank Governance in Monetary Policy Economics (1981-2020)," BAFFI CAREFIN Working Papers 21153, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    3. Hadj Fraj, Salma & Hamdaoui, Mekki & Maktouf, Samir, 2018. "Governance and economic growth: The role of the exchange rate regime," International Economics, Elsevier, vol. 156(C), pages 326-364.
    4. Hopkin, Jonathan & Blyth, Mark, 2018. "The global economics of European populism: growth regimes and party system change in Europe (The Government and Opposition/Leonard Schapiro Lecture 2017)," LSE Research Online Documents on Economics 100094, London School of Economics and Political Science, LSE Library.
    5. D. Masciandaro, 2019. "What Bird Is That? Central Banking And Monetary Policy In The Last Forty Years," BAFFI CAREFIN Working Papers 19127, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    6. Abel M. Agoba, 2021. "Minimising the inflationary impact of fiscal deficits in Africa: The role of monetary, financial and political institutions," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 724-740, January.
    7. Alesina, Alberto & Stella, Andrea, 2010. "The Politics of Monetary Policy," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 18, pages 1001-1054, Elsevier.
    8. Hadj Fraj, Salma & bouchoucha, Najeh & Maktouf, Samir, 2020. "Political stability and economic growth: the role of exchange rate regime," MPRA Paper 104586, University Library of Munich, Germany.
    9. William C. Gruben & Mark A. Wynne & Carlos E. Zarazaga, 2001. "Dollarization and monetary unions: implementation guidelines," Center for Latin America Working Papers 0201, Federal Reserve Bank of Dallas.

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    More about this item

    Keywords

    central bank independence; constitutional democracy; democratic control;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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