Bureaucratic Delegation and Political Institutions : When Are Independent Central Banks Irrelevent?
The government's ability to credibly commit to policy announcements is critical to the successful implementation of economic policies as diverse as capital taxation and utilities regulation. One frequently advocated means of signaling credible...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/06/437170/bureaucratic-delegation-political-institutions-independent-central-banks-irrelevent http://hdl.handle.net/10986/19842 |
| Summary: | The government's ability to
credibly commit to policy announcements is critical to the
successful implementation of economic policies as diverse as
capital taxation and utilities regulation. One frequently
advocated means of signaling credible commitment is to
delegate authority to an agency that will not have an
incentive to opportunistically change policies once the
private sector has taken such steps as signing wage
contracts or making irreversible investments. Delegating
authority is suggested as a government strategy particularly
for monetary policy. And existing work on the independence
of central banks generally assumes that government decisions
to delegate are irrevocable . But delegation - in monetary
policy as elsewhere-is inevitably a political choice, and
can be reversed, contend the authors. They develop a model
of monetary policy that relaxes the assumption that monetary
delegation is irreversible. Among the testable predictions
of the model are these: A) The presence of an independent
central bank should reduce inflation only in the presence of
political checks and balances. This effect should be evident
in both developing and industrial countries. B) Political
actions to interfere with the central bank should be more
apparent when there are few checks and balances. C) The
effects of checks and balances should be more marked when
political decisionmakers are more polarized. The authors
test these predictions and find extensive empirical evidence
to support each of the observable implications of their
model: Central banks are associated with better inflation
outcomes in the presence of checks and balances. The
turnover of central bank governors is reduced when governors
have tenure protection supported by political checks and
balances. And the effect of checks and balances is enhanced
in more polarized political environments. |
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