Goal-Independent Central Banks: Why Politicians Decide to Delegate
IMF Working Papers, November 1, 2006
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Bibliographic details
- Authors: Christopher W. Crowe
- Published: November 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451865165.001
Summary
- 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.
- 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.
Model and Predictions
- Develops a model of coalition formation that predicts when delegation to a goal-independent central bank will occur.
- Focus on coalition structure and coalition-formation game as determinants of delegation decisions.
- Uses the concept that delegation helps politicians manage diverse coalitions.
Empirical Analysis
- Uses policy preferences survey data and CBI indicators to test model predictions.
- Findings from the data support the model's predictions.
- Addresses the empirical relationship between CBI and inflation, highlighting endogenous selection bias that attenuates the estimated effect toward zero.
Case Studies
- Includes several country case studies drawn from recent past examples.
- Includes case study material from the nineteenth-century United States.
- Case studies provide additional support for the model’s predictions about delegation.
Key Findings and Implications
- Delegation to goal-independent central banks is motivated by coalition management needs of politicians.
- Empirical support comes from survey data and CBI indicators.
- Endogenous selection can explain the lack of a robust negative relationship between CBI and inflation in empirical work.