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When does delegation improve credibility? Central Bank independence and the separation of powers


  • Philip Keefer
  • David Stasavage


Delegation and policy rules are frequently suggested strategies for governments to establish credible commitments. Existing literature on rules and delegation in macroeconomic policy has generally avoided the question of why governments that delegate or establish rules do not subsequently reverse this decision. Either the decision is assumed to be irreversible, or reversal is assumed to be “politically costly” without further explanation. We develop several hypotheses which suggest that the difficulty in reversing a decision to delegate (or to establish a rule) depends on the structure of a country’s political institutions. Credible commitment through delegation can only be obtained in countries where political institutions provide for checks and balances on executive authority. Checks and balances ensure that the decision to override a legally independent central bank is not the prerogative of a single actor (or veto player). In countries with these characteristics, the extent of credibility gains will be greatest when political instability is moderate and when polarization is high. We find support for these hypotheses in tests using cross-country data - from both developed and developing countries - on central bank independence and political institutions.

Suggested Citation

  • Philip Keefer & David Stasavage, 1998. "When does delegation improve credibility? Central Bank independence and the separation of powers," CSAE Working Paper Series 1998-18, Centre for the Study of African Economies, University of Oxford.
  • Handle: RePEc:csa:wpaper:1998-18

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    1. Mark Hallerberg & Jürgen von Hagen, 1999. "Electoral Institutions, Cabinet Negotiations, and Budget Deficits in the European Union," NBER Chapters,in: Fiscal Institutions and Fiscal Performance, pages 209-232 National Bureau of Economic Research, Inc.
    2. Alesina, Alberto & Gatti, Roberta, 1995. "Independent Central Banks: Low Inflation at No Cost?," American Economic Review, American Economic Association, vol. 85(2), pages 196-200, May.
    3. Jonathan David Ostry & Anne Marie Gulde & Atish R. Ghosh & Holger C. Wolf, 1995. "Does the Nominal Exchange Rate Regime Matter?," IMF Working Papers 95/121, International Monetary Fund.
    4. Bohn, Henning & Inman, Robert P., 1996. "Balanced-budget rules and public deficits: evidence from the U.S. states," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 13-76, December.
    5. Adam S. Posen, 1995. "Declarations Are Not Enough: Financial Sector Sources of Central Bank Independence," NBER Chapters,in: NBER Macroeconomics Annual 1995, Volume 10, pages 253-274 National Bureau of Economic Research, Inc.
    6. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-398, September.
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    Cited by:

    1. Dillinger, William & Webb, Steven B., 1999. "Decentralization and fiscal management in Colombia," Policy Research Working Paper Series 2122, The World Bank.

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