Does high inflation cause central bankers to lose their job? Evidence based on a new data set

Abstract

This paper introduces new data on the term in office of central bank governors in 137 countries for . Our panel models show that the probability that a central bank governor is replaced in a particular year is positively related to the share of the term in office elapsed, political and regime instability, the occurrence of elections, and inflation. The latter result suggests that the turnover rate of central bank governors (TOR) is a poor indicator of central bank independence. This is confirmed in models for cross-section inflation in which TOR becomes insignificant once its endogeneity is taken into account.JEL Code: E5.

Central bank independence and inflation revisited

“…Or are central bank officials tossed out because they can't keep inflation down (Walsh 2005)? Indeed, Dreher et al (2008) find evidence that high past inflation increases the likelihood that a central bank governor will be replaced. 2 Also some cross-sectional studies using quantile regressions (Koenker 2005) suggest that the impact of CBI on inflation is not identical across countries (see, for instance, Temple 1998 andBouwman et al 2005).…”

“…The aim of this paper is to examine to what extent heterogeneity influences the relation between CBI and inflation using a panel model with some widely used controls included for the period 1980-2005. For this purpose, we use a random coefficient model with the Hildreth-Houck estimator as suggested by Bryk and Raudenbusch (1992) and the data of Dreher et al (2008). This dataset comprises information on the TOR for a large number of countries over the period 1970 to 2005.…”

Cross-Sectional Evidence on the Relation between Monetary Policy, Macroeconomic Conditions and Low-Frequency Inflation Uncertainty

“…Appointment dates, in turn, are provided by Sturm and De Haan (2001). This data set is also discussed in Dreher et al (2008Dreher et al ( , 2010 …”

“…Hence, we follow Sturm and De Haan (2001) and Dreher et al (2008Dreher et al ( , 2010 and relate changes in a monetary authority's degree of inflation-tolerance or -aversion to the appointment dates of central bank governors. We regard governors who are appointed under liberal governments as inflation-tolerant as opposed to the presumably inflation-averse governors appointed under other types of governments.…”

Superstar Central Bankers

“…One strand of the literature looks at the determinants and the effects of a replacement of the central bank governor. Dreher et al (2008) show that the probability of replacement increases with years in office, the degree of political instability, and the level of inflation. Furthermore, Dreher et al (2010) estimate the probability for a replacement of the governor before the end of his term in office.…”