The Political Economy of Monetary Institutions

Abstract

In recent decades, countries have experimented with a variety of monetary institutions, including alternative exchange-rate arrangements and different levels of central bank independence. Political economists have analyzed the choice of these institutions, emphasizing their role in resolving both the time-inconsistency problem and dilemmas created by an open economy. This “first-generation” work, however, suffers from a central limitation: it studies exchange-rate regimes and central bank institutions in isolation from one another without investigating how one monetary institution affects the costs and benefits of the other. By contrast, the contributors to this volume analyze the choice of exchange-rate regime and central bank independence together and, in so doing, present a “second generation” of research on the determinants of monetary institutions. The articles incorporate both economic and political factors in explaining the choice of monetary institutions, investigating how political institutions, democratic processes, political party competition, and interest group pressures affect the balance between economic and distributional policy objectives.

Open economy politics: A critical review

“…Like any paradigm, it guides research by specifying what is known and unknown, what is fact and anomaly. Originally formulated in the context of trade policy, OEP has been extended to monetary and financial relations (Frieden 1988a(Frieden , 1991Bernhard et al 2003), foreign direct investment (Jensen 2006;Pinto and Pinto 2008), immigration (Leblang et al 2007), foreign aid (Milner 2006), regulation (Mattli and Woods 2009;Richards 1999), corporate governance (Gourevitch and Shinn 2005), and global governance (Kahler and Lake 2003). It now forms a comprehensive approach to explaining a large range of foreign economic policies.…”

Transparency, Democratic Accountability, and the Economic Consequences of Monetary Institutions

“…The average equilibrium rate of inflation will be bk and the average equilibrium rate of output will be y * (given that f and e are mean zero). 5 The literature on monetary policy has considered a variety of mechanisms that might allow a politician to commit to a lower rate of inflation and as a result improve social welfare. One possibility is delegating policy to an independent central banker, who has a lower value of b than does the government.…”

“…In the case where a new government is trying to "build a reputation" for sound policy there may be uncertainty whether the government has merely adopted a "fair weather" strategy and will revert to a higher rate of inflation at some subsequent point. Recent contributions in game theory have suggested that it may, in many cases, be more relevant 5 The game is solved through backwards induction in the same manner as the standard Barro-Gordon game. The policy maker's preferred rate of inflation is solved for by first substituting equation 2, the supply curve, into her loss function (equation 1).…”

“…I assume that members of the public begin with a prior belief p that the intended inflation rate is 0 and a prior belief (1 − p) that the intended inflation rate is bk. As a consequence, the public's expected inflation can be expressed as in equation 5.…”

Sovereignty Regimes: Territoriality and State Authority in Contemporary World Politics

“…Many other Latin American countries in fact now float their currencies against the dollar and other currencies (IMF 1997;Berg et al 2003). From this point of view, Latin America is now relatively less dollarized officially than it was in the late 1980s when many of its countries had currencies that were closely pegged to the dollar or adopted so-called intermediate mechanisms such as crawling pegs and bands (Jameson 1990; more generally on trends in adopting fixed versus floating exchange rates across developed and developing countries, see Bernhard et al 2002;Joshi 2003). In other words, the continent is stuck between the globalist and the imperialist regimes, even though many governments, if given a choice, would aspire to classic sovereignty.…”