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Goal-Independent Central Banks; Why Politicians Decide to Delegate

  • Christopher W. Crowe

A motivation for central bank independence (CBI) is that policy delegation helps politicians manage diverse coalitions. This paper develops a model of coalition formation that predicts when delegation will occur. An analysis of policy preferences survey data and CBI indicators supports the predictions. Case studies, drawn from several countries' recent past and the nineteenth-century United States, provide further support. Finally, the model explains why the expected negative relationship between CBI and inflation is not empirically robust: endogenous selection biases the estimated effect towards zero. The data confirm this.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/256.

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Length: 41
Date of creation: 01 Nov 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/256
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  1. Ray, Debraj & Vohra, Rajiv, 1999. "A Theory of Endogenous Coalition Structures," Games and Economic Behavior, Elsevier, vol. 26(2), pages 286-336, January.
  2. Demange, G., 1991. "Intermediate Preferences and Stable Coalition Structures," DELTA Working Papers 91-16, DELTA (Ecole normale supérieure).
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  5. Christopher W. Crowe, 2006. "Goal-Independent Central Banks; Why Politicians Decide to Delegate," IMF Working Papers 06/256, International Monetary Fund.
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  7. Gauti B. Eggertsson & Eric Le Borgne, 2003. "A Political Agency Theory of Central Bank Independence," IMF Working Papers 03/144, International Monetary Fund.
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  9. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Working Papers in Applied Economic Theory 94-05, Federal Reserve Bank of San Francisco.
  10. Vishnu Padayachee, 2001. "Central Bank transformation in a globalized world: the Reserve Bank in post-apartheid South Africa," Journal of International Development, John Wiley & Sons, Ltd., vol. 13(6), pages 741-765.
  11. Moser, Peter, 1999. "Checks and balances, and the supply of central bank independence," European Economic Review, Elsevier, vol. 43(8), pages 1569-1593, August.
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  13. Keith Jaggers & Ted Robert Gurr, 1995. "Tracking Democracy's Third Wave with the Polity III Data," Journal of Peace Research, Peace Research Institute Oslo, vol. 32(4), pages 469-482, November.
  14. Bloch, Francis, 1996. "Sequential Formation of Coalitions in Games with Externalities and Fixed Payoff Division," Games and Economic Behavior, Elsevier, vol. 14(1), pages 90-123, May.
  15. Hayo, Bernd, 1998. "Inflation culture, central bank independence and price stability," European Journal of Political Economy, Elsevier, vol. 14(2), pages 241-263, May.
  16. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
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  18. Milesi-Ferretti, Gian Maria, 1994. "Wage Indexation and Time Consistency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 941-50, November.
  19. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
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