Monetary Institutions, Partisanship, and Inflation Targeting

Since 1989, twenty-five countries have adopted a monetary policy rule known as inflation targeting (IT), in which the central bank commits to using monetary policy solely for the purpose of meeting a publicly announced numerical inflation target within a particular time frame. In contrast, many other countries continue to conduct monetary policy without a transparent nominal anchor. The emergence of IT has been almost completely ignored by political scientists, who instead have focused exclusively on central bank independence and fixed exchange rates as strategies for maintaining price stability. We construct a simple model that demonstrates that countries are more likely to adopt IT when there is a conformity of preferences for low-inflation monetary policy between the government and the central bank. More specifically, the combination of a right-leaning government and a central bank without bank regulatory authority is likely to be associated with the adoption of IT. Results from a spatial autoregressive probit model estimated on a time-series cross-sectional data set of seventy-eight countries between 1987 and 2003 provide strong statistical support for our argument. The model controls for international diffusion from neighboring countries by accounting for spatial dependence in the dependent variable, but our results indicate that domestic interests and institutions—rather than the influence of neighboring countries—drive the adoption of IT.We thank David Bearce, Bill Bernhard, Cristina Bodea, Lawrence Broz, Bill Clark, Nate Jensen, Phil Keefer, David Leblang, Eric Reinhardt, Shanker Satyanath, Jerome Vandenbussche, Robert Walker, Tom Willett, and the editors and anonymous reviewers for helpful comments and suggestions. We also thank Sergio Bejar and Jon Bischof for research assistance. Earlier versions of this article were presented at the first annual International Political Economy Society meeting, the 11th annual conference of the International Society for New Institutional Economics, and the 2007 annual meeting of the Midwest Political Science Association; we thank the conference participants for their feedback and suggestions. Mukherjee thanks the Niehaus Center for Globalization and Governance at Princeton University for research support.