A Political Explanation of Variations in Central Bank Independence

Abstract

Although central banks possess a similar function across the industrial democracies, their institutional structures—their levels of independence—differ greatly. My explanation of this variation emphasizes the informational asymmetries of monetary policymaking. Government ministers have informational advantages in the policy process, potentially creating conflicts with backbench legislators and, in a multiparty government, coalition partners. An independent central bank can help alleviate these conflicts. Politicians will choose an independent bank (1) if government ministers, party legislators, and coalition partners have different monetary policy incentives and (2) if government ministers fear that party legislators and coalition partners will withdraw their support over a policy dispute. I statistically test the argument against the cross-national variation of central bank institutions. I also use the theoretical framework to examine episodes of institutional choice and reform in Germany, Britain, and Italy.

Checks and Balances, Private Information, and the Credibility of Monetary Commitments

“…4 Bernhard, Broz and Clark (2002). See also Bernhard (1998), Maxfield (1997), (Broz, 1999) The remainder of the paper is organized as follows. We first consider the conditions under which central banks and exchange rate pegs will increase credibility of monetary policy in a world of complete information.…”

The Politics of Central Bank Independence

“…But if legislators, coalition partners, and government ministers share similar policy incentives or where the government's position in office is secure, central bank independence will be low. Bernhard (1998) provides evidence in support for this view. Several proxies suggested by this theory, such as the Alford index (measuring class voting), a proxy for bicameral systems, and the threat of punishment (reflecting the polarization of the political system, legislative institutions, and the existence of coalition and minority governments), are all significant in cross-country regressions explaining differences in CBI.…”

“…Several authors provide political explanations for why delegating to independent monetary authorities might be attractive. For instance, according to Bernhard (1998), information asymmetries create potential conflicts between different political actors, such as backbench legislators, coalition partners, and government ministers. The severity of these conflicts conditions politicians' incentives regarding the choice of central bank institutions.…”

Power delegation and the European Central Bank's democratic deficit

“…In practice, the non-majoritarian institutions are more accountable in qualities such as professionalism, continuity or impartially than direct political responsibility. 8 Alerted by the perception of the democratic deficit, the ECB made a statement that "independence and accountability are the sides of the same coin" and even declared their ambition to turn the Bank into "the most transparent and accountable 7 Various comparison studies have been done by political scientist/economists on the degree of central bank independence from 1970-1998 such as Lijphart (1999), Bernhard (1998), Alesina andSummers (1993), Cukierman (1992);and Grilli et al (1991) that have come up with the same result: Germany and Switzerland rank higher than the US and the UK is hardly in the top 10. See Lijphart (1999) and Bernhard (1998) for further insights.…”