Political instability and inflation volatility

The purpose of this paper is to empirically analyze the effects of political instability, social polarization and the quality of institutions on inflation volatility over time and across countries. Using the system-GMM estimator for linear dynamic panel data models on a sample covering 160 countries, analyzed in the period from 1960 to 1999, this paper finds that higher degrees of political instability and social polarization, less democracy, and lower de facto central bank independence are associated with more volatile inflation rates. Furthermore, political instability has greater effects on inflation volatility in developing countries with lower degrees of central bank independence and economic freedom.     

Variation in central bank independence across countries: Some provisional empirical evidence

In this paper seven hypotheses to explain variation in central bank independence across countries are tested. The predictions based upon the theory that delegation of authority by politicians to the central bank is used as a commitment device are not supported: central bank independence is not higher the larger the employment motivated inflationary bias, the higher political instability or the larger the government debt. Central bank independence is positively related to historical inflation experience and negatively with political instability. We do only find limited support for the view that countries with a universal banking system and countries whose central banks do not regulate financial institutions have more independent central banks.     

Independent central banks, regime type, and fiscal performance: the case of post-communist countries

This article analyzes the effect of central bank independence on fiscal deficits. Previous literature finds a negative relationship between bank independence and deficits in OECD countries. No such relationship is found for developing countries. We argue that independent and conservative central bankers prefer budget discipline due to the long run connection between deficits and inflation and can enforce their preference through interest rate hikes and refusal to lend to the government. The claim, however, is that the legislated independent status of the central bank is cheap talk in the absence of democratic institutions. We test empirically the conditional effect of central bank independence on a sample of 23 democratic and undemocratic post-communist countries from 1990 to 2002. Results show that independent central banks restrain budget deficits only in democracies. Also, democracies that have not granted independence to their central banks have the worst fiscal discipline.     

Political economy of agricultural policy

The present paper uses a paneldata estimation technique to combine the time series for individual countries (Australia, Canada, France, Germany, Italy, Japan, the Netherlands, Switzerland, the United Kingdom and the United States). We postulated the response of central banks in these countries to inflation, economic growth and current account surplus given the constraints to be the same among the sample countries. Differences between central bank independence come forward in a different structural pressure to lower or raise money market rates in these countries. The empirical results in this study coincide remarkably well with the legal indices of central bank independence.     

Democratic accountability and central bank independence: Historical and contemporary,national and European perspectives

Recently there has been a general move towards greater central bank independence in Europe. Countries such as Belgium, Britain, France and Spain have all increased the autonomy of their respective central banks. In this context, some people have argued that the prospects for democratic, representative government have been weakened. In these countries, democratically elected governments can no longer control the process of monetary policy making. By constructing an index of central banks’ independence, this article shows that the recent moves towards central bank independence in Britain and France have not challenged the basic foundations of indirect political accountability. However, it also shows that the proposed institutional architecture of the European Central Bank is a departure from the norms of political accountability and that, in this case, there is a distinct ‘democratic deficit’ which needs to be addressed.     

Agencies’ formal independence and credible commitment in the Latin American regulatory state: A comparative analysis of 8 countries and 13 sectors

This article tests functional and institutional explanations for the different levels of formal independence of regulatory agencies in Latin America. The analysis is grounded in an original database of the formal independence level of 104 regulators in 8 countries and 13 regulatory sectors. The results challenge a central claim of the credible commitment hypothesis as they indicate that privatization is not a significant determinant of agency independence nor are utility regulators more likely to be independent than other economic regulators. Veto players are positively correlated with formal independence, indicating that in developing countries they operate together as credibility‐enhancing mechanisms, rather than as functional equivalents, as previous studies on developed countries have shown. Democratization is positively correlated with formal independence, whereas trade opening and vulnerability to international pressures has no significant impact. Hence, this article enhances the understanding of the delegation of regulatory powers to formally independent agencies in developing countries.     

Central bank independence and inflation revisited

We re-examine the relationship between central bank independence (CBI), proxied by the central bank governor’s turnover rate and an indicator based on central bank laws in place, and inflation using a random coefficient model with the Hildreth-Houck estimator for more than 100 countries in the period 1980 to 2005. We conclude that there exists no general significant negative relation between our indicators of central bank independence and inflation. Central bank independence has a significant effect only in a minority of the countries in our sample.     

Economic performance of 'weak' governments and their interaction with central banks and labour: Deficits, economic growth, unemployment and inflation, 1961–1998

Abstract.   Comparative political economists have conventionally claimed that the strength and stability of governments affect policy making and performance, and that what they call 'weak governments'– multiparty, minority and short-lived governments – show poorer economic performance. This article tests this and related hypotheses on deficits, economic growth, unemployment and inflation by examining data from 17 OECD countries. I find that there is generally little evidence to indicate that so-called 'weak governments', when considered independently, produce poorer performance than strong ones. However, the effects of different government types are partly contingent on central bank independence and labour organization. When central banks are independent, coalition governments exhibit better inflation and economic growth performance than one-party governments, but the opposite happens when central banks are dependent. I attempt an explanation for these relationships. I also find that independent central banks, under certain conditions, lead to lower growth and higher inflation. Thus, some of the benefits of central bank independence are context-specific, depending on other political-economic factors.     

Central bank independence and inflation: Corporatism,partisanship, and alternative indices of central bank independence

A well-developed theoretical literature suggests that central bank independence causes low inflation. Empirical work supporting this hypothesis is unsatisfactory, however, for two reasons: statistical analysis has only recently begun to include control variables, and important political variables that are related to inflation have not yet been included; analysis has not yet undertaken a systematic comparison of alternative indices of central bank independence. This paper addresses both weaknesses by testing the explanatory power of eight indices of central bank independence in a political-economic model of inflation. The results suggest that while support for the central bank independence hypothesis survives a relatively inclusive set of control variables, support for the hypothesis is not independent of the particular index upon which analysis relies.     

Reconsidering the principal components of central bank independence: The more the merrier?

We use principal component analysis to reassess the link between different attributes of central bank independence and inflation performance. We suggest that coding problems may account for the fact that almost none of the attributes included in the Cukierman index has a systematic, plausible relationship with inflation. The multi-faceted Cukierman index also seems to be out-performed by a much narrower index focusing solely on policy independence. These findings point to the importance of using public choice analysis to isolate the real problem here: namely, finding specific central bank structures that effectively insulate central bankers from political pressures.     

An Integrative Approach to the Politics of Central Bank Independence: Lessons from Britain,Germany and Italy

This article proposes a three-tier framework for analysing the politics of central bank independence. International factors explain the general trend towards central bank independence. However, they are framed differently by various national systems. At the national level, for heuristic purposes, the analysis can be structured by focusing on ‘suppliers’ and ‘demanders’ of central bank independence. The former are the political authorities, whereas the latter are socioeconomic forces and interest groups, with the central bank positioned in-between. At the micro-institutional level, central banks can be influential economic and political actors situated at the interface between levels of governance. The added value of this integrated framework is appraised using one case study, the Bank of Italy's path to independence, which is compared with the experience of the Bank of England and the Bundesbank. In contrast to many works on central bank independence, the methodology adopted here is qualitative, rather than quantitative, and is grounded in empirical research.     

Epistemic Communities and the Diffusion of Ideas: Central Bank Reform in the United Kingdom

In May 1997 the incoming Labour government gave the Bank of England operational independence in the setting of interest rates. This reform is puzzling as it was introduced by a party whose roots lie with the trade union movement, and resisted by the Conservatives whose political support comes largely from business, the financial sector and homeowners who stand to benefit most from price stability. Economic ideas are central to explaining the outcome. The Labour Chancellor was convinced by an epistemic community of monetary experts that central bank independence would achieve New Labour's electoral goals. These political incentives were absent for the Conservatives, who preferred to set interest rates strategically to increase their popularity with voters.     

Partisanship in the setting and coordination of fiscal and monetary policies

Abstract. The principal concerns of this paper are with the roles partisan politics have played in the making of fiscal and monetary policies within OECD countries as well as the extent to which these policies have complemented each other. It is argued that parties of the left pursue fiscal policies that are distinctly different from those pursued by the right. The critical difference is in the way these parties use fiscal policy as a corrective mechanism for dealing with macroeconomic problems: leftist parties adopt counter–cyclical fiscal policies while rightwing parties adhere to pro–cyclical fiscal stances. The paper also examines two arguments regarding monetary policy and how partisan politics affect this policy area. The first and most conventional argument sees the formal independence of the central bank from government as a means of negating partisan influences on monetary policy; the second advances the proposition that, regardless of central bank independence, monetary authorities are not politically neutral but instead share views similar to those of parties on the right–hand side of the political spectrum. Empirical analysis, using a pooled cross–section time–series design with data from 14 countries between 1961 and 1994, produces evidence in favor of the argument concerning the role of partisanship in fiscal policy; it also shows little support for the view that central bank independence inhibits partisan influences while at the same time provides support for the thesis that central banks are politically non–neutral. Thus, coordination between fiscal and monetary policies is far less likely to occur when left–wing parties are in power.     

Partisanship in the setting and coordination of fiscal and monetary policies

The principal concerns of this paper are with the roles partisan politics have played in the making of fiscal and monetary policies within OECD countries as well as the extent to which these policies have complemented each other. It is argued that parties of the left pursue fiscal policies that are distinctly different from those pursued by the right. The critical difference is in the way these parties use fiscal policy as a corrective mechanism for dealing with macroeconomic problems: leftist parties adopt counter–cyclical fiscal policies while rightwing parties adhere to pro–cyclical fiscal stances. The paper also examines two arguments regarding monetary policy and how partisan politics affect this policy area. The first and most conventional argument sees the formal independence of the central bank from government as a means of negating partisan influences on monetary policy; the second advances the proposition that, regardless of central bank independence, monetary authorities are not politically neutral but instead share views similar to those of parties on the right–hand side of the political spectrum. Empirical analysis, using a pooled cross–section time–series design with data from 14 countries between 1961 and 1994, produces evidence in favor of the argument concerning the role of partisanship in fiscal policy; it also shows little support for the view that central bank independence inhibits partisan influences while at the same time provides support for the thesis that central banks are politically non–neutral. Thus, coordination between fiscal and monetary policies is far less likely to occur when left–wing parties are in power.     

Central bank independence in Latin America: Politicization and de-delegation

In the last three decades, legal delegation of monetary policy to independent central banks (CBI) has achieved the status of a global norm of good governance. The recent backlash against this independence is an important but understudied trend. Our article analyzes the potential for delegation reversals with a focus on Latin America where CBI was effective in maintaining price stability, but placed important policy constraints on governments. We theorize that, in the shadow of the global norm for CBI, the increasing distance in preferences between the government and the central bank, and the procedural hurdles to change the status quo, explain the intensity of challenges to the delegation contract or the delegated agent. An analysis of the frequency of irregular central bank leadership replacements, and instances of politicization and de-delegation show the plausibility of our argument. We also show that, in Latin America, reforms de-delegating monetary policy have been small, balancing the needs that justified delegation in the first place, but rolling back the most stringent constraints placed on financing the government.     

Political freedom, economic freedom, and income convergence: Do stages of economic development matter?

In the literature, theory and empirical evidence on the nexus of political freedom, economic freedom, and economic growth are mixed. In this paper, we test the hypothesis that the effect of political freedom on promoting economic growth is realized and detectable at later stages of social and economic development. Using panel data for a sample of 104 countries between 1970 and 2003, we find strong support for our hypothesis. While economic freedom has greater effects on income convergence in the OECD countries, political freedom clearly promotes the convergence among those OECD countries.     

Political fragmentation, fiscal deficits and political institutionalisation

One line of research finds the size of the deficit to be positively correlated with the number of political actors. This ‘political fragmentation’ hypothesis has been tested on OECD countries. We successfully replicate Volkerink and de Haan’s (Public Choice 109:221–242, 2001) model on an OECD sample. However, when we add ten non-OECD countries, the effect of political fragmentation disappears. We argue that the importance of political fragmentation varies according to the institutionalization of political systems. When we interact the age of a democracy with political fragmentation, we find that legislative fractionalisation increases the budget deficit as a democracy becomes more institutionalised.     

The European Central Bank: Independence, accountability and strategy: A review

This paper reviews research on central banking and monetary policy, with special emphasis on the position of the future European Central Bank. Nowadays, it is often thought that an independent central bank with an explicit mandate to aim for price stability constitutes an important institutional device to assure price stability. Indeed, the ECB will be one of the most independent central banks as follows from the codings of various indicators measuring legal independence. Still, it does not follow straightforwardly from the literature that the Statute of the ECB is optimal. It is also argued that the accountability of the ECB is poorly arranged for in comparison with that of several national central banks. Finally, the discussion about the monetary strategy of the ECB is reviewed.     

Median Voter Preferences,Central Bank Independence and Conservatism

This paper studies how the independence and theconservatism of a central bank relate to the structureand stability of the median voter preferences. This isdone by means of a model of endogenous delegationwhere an opportunistic policy maker chooses themonetary regime (independence and conservatism) tomaximise the welfare of the median voter. The resultsshow that a high degree of inflation aversion ofmonetary policy is not necessarily associated with ahigh degree of central bank independence. A high andstable degree of inflation aversion of society (i.e.of the median voter) may lead to establish a dependentcentral bank which is highly inflation averse. This suggests that the negativecorrelation between inflation and central bankindependence indices detected by several empiricalstudies may reflect a link between inflation and somedeep features of social preferences.     

Policy decisiveness and responses to speculative attacks in developed countries

Why are some countries able to defend their currencies when there are speculative attacks, while others fail to do so and devalue their currencies? This article suggests that intragovernment factors as well as government‐legislature relations should be considered because many of the policy responses to speculative attacks do not require legislative acquiescence, so that intragovernment attributes will have more substantial effects on the policy responses than those of government‐legislature relations. This article suggests that cleavages within government and its instability have a negative effect on decisiveness. Data regarding speculative attacks in developed countries from the 1970s to the 1990s and the Heckman selection model show that governments with many veto players and with less durability have had difficulty in defending their currencies in the face of speculative attacks. The article also finds that governmental institutional effects can be constrained by central bank independence. The effects become substantially smaller and statistically insignificant when central banks are very independent. The overall results imply that policy indecisiveness induced by some political factors makes governments less able to adopt a new policy equilibrium that is necessary to respond to an exogenous shock such as speculative attack.