Professional Documents
Culture Documents
To cite this article: Kathleen McNamara (2002): Rational Fictions: Central Bank Independence and the Social
Logic of Delegation, West European Politics, 25:1, 47-76
To link to this article: http://dx.doi.org/10.1080/713601585
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Rational Fictions:
Central Bank Independence and the
Social Logic of Delegation
K AT H L E E N R . Mc NAMARA
The insulation of central banks from the direct influence of elected officials
has been one of the pre-eminent examples of the practice of delegation to
non-majoritarian institutions. More countries increased the independence of
their central banks during the 1990s than in any other decade since World
War II.1 This wave of institutional delegation showed little regard for region,
sweeping across countries as diverse as Albania, Sweden, Kazakhstan, and
New Zealand. Central bank independence has been promoted by
international organisations such as the OECD and the IMF as a benchmark
of good governance. It was also used by European Union (EU) leaders as an
obligatory criteria for entry into Economic and Monetary Union (EMU).
The EUs new European Central Bank (ECB), established in 1999, takes
central bank independence to the extreme, with only weak channels of
political representation and oversight.
Central bank independence has achieved an almost taken for granted
quality in contemporary political life, with little questioning of its logic or
effectiveness. Indeed, the theoretical rationale behind the delegation of
political authority to independent central banks is straightforward and
appears ironclad in its logic: the preference of politicians chasing votes in
the next election will be to manipulate the economy in ways that make the
populace happy in the short term, disregarding the potential for their
monetary policies to produce economic trouble in the long run. Thus, it
seems reasonable to assume that central bank independence is a necessary
solution to a functional economic policy problem, and that it is this
efficiency logic that has produced the dramatic move towards increased
independence over a wide swath of nations.
This article will challenge this conventional wisdom. On the theoretical
level, it will argue that advocates of central bank independence rely on a
series of contestable arguments about the relationship between democracy,
policy making, and economic outcomes. First, although advocates of central
bank independence argue for the need to insulate monetary policy from
politics, severing ties to democratic representatives and relying on
West European Politics, Vol.25, No.1 (January 2002), pp.4776
PUBLISHED BY FRANK CASS, LONDON
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of the arguments and evidence on why countries have chosen central bank
independence. It contrasts the conventional wisdom, which suggests that
central bank independence is adopted due to pressing functional necessity,
against a literature on the sociology of organisations that suggests that
central bank independence is determined by a social process of crossnational institutional diffusion. Finally, the article concludes by examining
the broader political implications of the argument. It suggests that while
central bank independence may be a highly legitimate organisational form
in terms of the contemporary ideology of neoliberalism, it can have
troubling implications for democratic legitimacy and accountability. This is
particularly true in the case of the European Central Bank, and the tensions
that flow from this legitimation problem remain unresolved.
40
35
30
25
20
CB
15
10
5
0
Sources: Pre-1990s data on legal central independence by decade comes from A. Cukierman,
Central Bank Strategy, Credibility, and Independence: Theory and Evidence
(Cambridge: MIT Press 1992). Data on legal CBI in the 1990s comes from S. Maxfield,
Gatekeepers of Growth: The International Political Economy of Central Banking in
Developing Countries, Table 4.1. Post-1994 CBI data comes from the European
Monetary Institute, Convergence Reports 1998 and 1999, and from press reports of
national central bank legislation in non-EU countries. A central bank is independent if
it recieves a score of .35 or higher from Cukierman et al. for the period 195089. After
1989, central banks are assumed to remain independent once they reach the threshold
identified by Maxfield. Post-1994 central banks are coded by author using the
Cukierman standard.
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variation over time in the number of central banks that can be classified as
legally independent.
Yet, perhaps because monetary policy is such a seemingly technical and
arcane research area, much of the broader political science discussion of
principalagent issues occurs separately from the discussion in economics
about central bank independence, with some important exceptions.2 This first
section of the article thus attempts to situate the logic of central bank
independence within the principalagent literature and lays out, as simply as
possible, the conventional wisdom regarding the logic of delegation in this
issue area. After summarising the arguments for central bank independence,
the article offers some conceptual critiques of this logic before examining the
empirical evidence regarding the costs and benefits of central bank
independence.
The basic premise of principalagent (PA) theory is that in certain
instances, one actor (the principal) may gain from delegating power to another
actor (the agent) if there is an expectation, first, that the agents subsequent
actions will be aligned with the principals preferences and, second, that
moreover there is some advantage to moving policy capacity to the agent.3
Although developed in the context of American congressional politics, PA
analysis offers a ready-made framework that directs our attention to
similarities across a wide range of activities of delegation. It has the potential
to highlight nuances in the interplay between key actors, for example, the role
of EU member states as principals and the role of central banks as agents. In
the case of EU institutions, in particular, PA offers a more dynamic and
potentially more productive understanding of the mutual dependence of
agents and principals than is possible using intergovernmental or functionalist
approaches.4 The focus of this article, however, is the decision to delegate,
examining the rationale for the act of moving control for day to day
governance activities out of the hands of those who at first glance should be
most desirous of keeping it. As outlined in the Thatcher and Stone Sweet
introduction to this volume, the PA analysis identifies common reasons why
principals choose to delegate, one of which, the resolution of commitment
problems, is widely given as the reason for central bank independence.
Thatcher and Stone Sweet note that commitment problems have a distinct
logic in the delegation game. The assumption underlying delegation in these
areas, as we shall see, is that it will allow principals to overcome the obstacles
lying in the way of more optimal policies. Drawing on PA analysis, Thatcher
and Stone Sweet note that commitment problems also tend to produce
delegation with minimal ex post control over agents, as the institution in
question needs to appear as delinked as possible from the principal if it is to
appear credible. The spread of central bank independence certainly matches
this general logic and its predictions about the form of delegation.
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parties of the right. These leftist parties have traditionally targeted their
appeal to workers, not investors, and therefore may give more priority to
growth and unemployment than to price stability.7 Logically, therefore,
these parties on the left may be more likely to pursue expansionary policies
that, again, may be desirable in the short run but in the long run may
produce unacceptably high levels of persistent inflation. Inoculating central
banks from these partisan and electoral effects by placing monetary policy
in a technocratic realm, separate from politics, is the policy prescription for
the hypothesised shortcomings of democracy.
These electoral and partisanal challenges, supported by deductive
arguments from the rational expectations approach, mean the only way out
of this conundrum is for the central bank to be able to commit credibly to
keeping inflation low.8 Delegation to non-representative institutions is seen
as the key way to enhance commitment.9 By removing the bank from
democratic pressures and establishing that it is free from political influence,
the central bank may be able to convince actors in the economy that it has
no incentive to manipulate the money supply for political gain. The most
positive scenario, in this line of reasoning, is that once credibility is
established the independent central bank can undertake surprise reflations
of the economy, sparingly and at unpredictable times, ultimately producing
more effective monetary expansions without inflationary side effects.
Assuming for the moment that policy makers have a long run view of
their self-interest such that the solution of delegation will be attractive, the
functional logic of central bank independence sets up the next important
question: how should policy makers go about establishing a credible
delegation of policy authority to the central bank? The achievement of
central bank independence is generally viewed as dependent on at least
three factors: a low degree of political involvement in personnel matters
within the bank; the financial separation between the central bank and the
government; and the policy independence of the central bank from political
directives from the government.10 Independence in personnel matters is
usually assumed to be highest when there are long, non-renewable terms of
office, arms-length appointment procedures, and very high barriers to
dismissal of central bank authorities. Financial independence is important to
the overall degree of independence as governments that rely on their central
banks for credit or management of the government debt are by definition
much more intertwined in central bank policies. Finally, the setting of
monetary policy itself is subject to degrees of independence, and theorists
have often separated out goal independence from instrument independence.
If the central bank is free to set the final objectives of monetary policy, be
it zero inflation or smoothing output, the government has delegated policy
goals. The government may also give the central bank discretion over how
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it achieves those goals, that is, the instruments used such as inflation
targeting or monetary targeting. These two are not always found together,
for example, the European Central Bank is directed to pursue the goal of
price stability, although it is not further defined numerically, while there is
no effort to specify the instruments the ECB should use to further that goal.
Obviously, independence is a continuum, and legal independence is not a
perfect guide to independence in practice. Some banks, such as the preEMU Dutch central bank, may be behaviourally independent and treated as
such by society and government, although their statutes do not ascribe them
as much legal independence as other banks.
Despite disagreement over the exact practical contours of independence,
the arguments regarding the delegation of monetary policy are compelling.
Monetary policy is an uncertain realm that can have great impact on the
macroeconomy, for ill or good. Delegation seems to provide a one size fits
all solution to the politicisation of monetary affairs. However, the
theoretical rationales rest on shakier foundations that might be apparent at
first glance. Below, two critiques of the essential premises of central bank
independence are put forward. The first critique confronts the question of
whether severing ties to democratic representatives and shifting to
technocratic expertise within an insulated institution does truly apoliticise
monetary policy making; the second point asks whether focusing solely on
the governmentcentral bank relationship captures the most significant
influences on monetary policy outcomes. Both questions are answered in
the negative, challenging the functional logic of delegation.
THE POLITI CS OF CENTRAL BANK I ND E P E N D E N C E
My first critical argument concerns the basic premise underlying the logic
of central bank independence: delegation is warranted because of the need
for economic expertise to provide more optimal, politically neutral policy
solutions, policies that are not readily accomplished in the context of
political intervention.11 Delegation to central banks is attractive in part
because it seems to place priority on improving aggregate welfare, on
making the economy work better for the majority of people by taking
monetary policy away from the vicissitudes of electoral and partisanal
politics. This logic is illusory, however. While severing the direct
institutional ties to elected officials appears to create an apolitical
environment for policy making, central banks continue to make policies
which have important, identifiable distributional effects and thus remain
resolutely political and therefore partisanal institutions.
As Joe Stiglitz has written, the decisions made by central bankers are
not just technical decisions: they involve trade-offs, judgments about
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whether the risks of inflation are worth the benefits of lower unemployment.
These trade-offs involve values.12 The values at the core of delegation to
independent central banks are neoliberal in nature, as the purported effects
of the electoral and partisanal influences on central banking all ultimately
centre on the risk of inflation and its potential for detrimental long term
effects on the economy.13 Thus, although principalagent analysis focuses
on delegation as a procedural solution, delegation in the area of central
banking is a substantive choice as well. The privileging of price stability
over growth and employment has important consequences. Those with
money to save and invest may benefit from a low and stable rate of inflation,
although if it falls so low as to choke off growth entirely, their investments
will suffer as well. Those who rely on wages will tend to be helped more by
a growing economy which maintains high levels of employment. Very high
levels of inflation will dampen the investment and economic activity that
workers rely on as well as eroding the capital of the wealthier groups. There
is also an intergenerational component to the distributional effects of
inflation. Older, retired workers will be more affected by inflation as they
rely on investments and savings, whereas their children and grandchildren
may be more affected by slowdowns in the economy. These distributional
consequences of central bank independence have been subject to relatively
little analysis in the literature or in the popular discourse, as the logic of
central bank independence projects a procedural and political neutrality to
the process of delegation that mutes questions about the values being traded
off in pursuit of price stability.14
Given these distributional impacts, delegation raises important
democratic accountability questions. In the general principalagent
literature, one of the potential benefits of delegation is to move policies
closer to the desires of the median voter, desires that for some reason are
difficult to achieve without such delegation. Thus, it can be argued that
delegation is actually more democratic than allowing politicians to hold
sway over policy for their own ends, subverting the common good.
However, the argument in favour of central bank independence has evolved
differently, positing in effect that the desires of the median voter should not
guide policy. In fact, one influential article argues that the ideal central bank
appointee will be more conservative and anti-inflationary than the median
voter, as the latter might favour more growth without factoring the
potentially negative longer run consequences of expansionary policies.15
Indeed, the structure of central bank independence does not make it likely
that the median voters preferences are captured. The majority of
individuals appointed to central bank boards, even when the ruling party is
on the left, are from the private banking or investment communities, with a
very small representation from industry and virtually no representation from
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other sectoral groups such as labour. This makes it less likely that a diverse
spectrum of views will be represented. The limited role for political
representatives in government positions in the formulation and execution of
monetary policy may make it difficult to rein in central bankers that deviate
too far from social norms regarding the management of the economy.16
However, the argument for central bank independence made by many
economists and policy makers pays little attention to this danger of too
much autonomy on the part of the agent, because of the underlying
assumption that the principal (the national government) does not necessarily
know its own interests. This is in contrast to much of the principalagent
literature, which has tended to stress the potential for difficulties on the
agent side, arising from too much delegation or control shifting away from
the principals.17 Two types of procedural problems are identified as
potentially arising from delegation: agency shirking and agency
slippage. Shirking and slippage imply some sort of non-compliance by the
agent such that the agent is no longer following the goals of the principal.18
The purposefully low level of direct political oversight in the area of central
banking means that it is likely that independent central banks will have an
intentionally high degree of agency slack. This is a positive development if
you are confident in the merits of governance by highly conservative central
bankers who exceed the preferences of elected officials for low inflation.
However, such delegation may produce monetary authorities who pursue
the goal of low inflation with too much zeal and thus have the potential to
stave off needed growth and employment in the economy, without much
leeway for the principals (that is, the governments) to correct this policy
drift.
Finally, a further and related conceptual critique of the principalagent
framework of central bank design is that it may overly emphasise the
importance of a narrow set of dynamics between the government and the
central bank at the expense of the broader societal dynamics that play a key
role in economic policy outcomes. A strong argument can be made that
central bank independence is a behavioural, not legal or organisational,
phenomenon, and that it is more a function of societal relations, shared
expectations and other such variables, rather than rules and institutional
designs.19 Delegation does not occur in a political vacuum, and to what
degree the effectiveness of the institutional form is actually endogenous to
prior political relationships is a key question not adequately addressed in
much of the debate. Persuasive logical arguments can be made in support of
explicit and transparent linkages to electoral institutions, be it as official
oversight or informal interactions, in order for the central bank to have the
political support and policy co-ordination needed to achieve positive policy
outcomes. In the case of Germany, for example, a complex set of societal
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Conceptual critiques are all very well, but what about the empirical case for
central bank independence? Can it be demonstrated to have been successful
in ameliorating inflation or improving economic conditions across the
various national settings? The rational choice institutionalist logic of
delegation is based on the idea that policy makers choose these institutional
designs in the expectation that they will address a compelling problem and
produce better outcomes a more optimal level of inflation in conjunction
with employment and growth. Political influence, in the logic of central
bank independence, can be dysfunctional for the economy, and the positive
outcomes achieved from delegation therefore can be argued to outweigh
concerns about the loss of democratic accountability.
To evaluate the necessity and efficacy of delegation in the management
of money, three questions of the empirical research on central banking are
asked. Can it be demonstrated (1) that there has indeed been a problem with
democracy that central bank independence must solve, that is, a pattern of
political business cycle behaviour or partisanal bias producing inflationary
outcomes; (2) that inflation itself can be empirically demonstrated to be
highly detrimental such that it presents a compelling rationale for central
bank independence; or (3) that central bank independence does indeed
produce more positive economic outcomes, outcomes that better match the
long term interests of policy makers and citizens than those achieved with
politically dependent central banks? Empirical evidence on these points
would certainly provide support for the functional argument regarding
central bank independence.
On the first issue of whether electoral or partisanal influences on
monetary policy are a critical factor producing high levels of inflation, the
empirical evidence is mixed at best. A recent survey of the political business
cycle literature and the effects of electoral politics on central banks assessed
25 years-worth of studies and found that the literatures evidence is thin, and
the principal conclusion is that models based on manipulating the economy
via monetary policy [for political gain] are unconvincing both theoretically
and empirically. The author goes on to argue that explanations based on
fiscal policy conform much better to the data and form a stronger basis for
convincing theoretical model of electoral effects on economic outcomes
than do monetary policy manipulations.21 Governments may try to influence
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the outcomes of elections by using the economic levers at hand, but those
tools tend to be traditional pork barrel politics, that is, spending projects that
may stimulate the economy, rather than manipulations of the money supply.
Neither have analysts found convincing evidence of systematic
partisanal differences in monetary policy since the 1970s. While work done
on cross-national experiences in the early post-war era demonstrated
evidence for partisanal effects, these effects have declined over the past few
decades, in advance of the widespread delegation of central banks.22 The last
few decades of experience have produced strikingly convergent monetary
policies in the EU, for example, oriented towards low inflation policies
regardless of what party is in power, whether it was the leftist Socialists in
Spain or the Christian Democratic right in Germany. This convergence
preceded the move to central bank independence, suggesting that other
factors beyond the organisational delegation of monetary policy are at work
in producing price stability, despite democratic influences.
The second key question concerns the empirical evidence on the
negative effects of inflation itself. The literature on delegation to central
banks takes as given the fact that inflation is extremely detrimental and must
be avoided at all costs. Nonetheless, Stiglitz is one prominent economist
who has questioned this assumption, and he offers persuasive empirical
evidence for his position.23 He points out that an older literature evaluates
the costs of inflation in terms of such things as menu costs, shoe leather
costs, tax distortions and increasing noise in the price system; however, the
empirical estimates of the deadweight losses from these factors are
relatively small. A newer literature has looked at how inflation might affect
the level of output and growth. Studies by Bruno and Easterly have found
that inflation rates need to be quite high, in excess of 40 per cent per year,
to be very costly, and that below that level there is little evidence of a high
inflation/low growth trap.24 In addition, studies have done cross-country
comparisons of the effects of inflation on growth.25 Echoing the earlier
findings, they find that while very high levels of inflation are detrimental to
growth, lower levels do not seem to have the same impact.
Stiglitz goes on to present his own evidence regarding two other
common assumptions about why inflation should be kept extremely low:
that inflation will accelerate uncontrollably if left unchecked, and that it is
costly to reverse.26 In fact, Stiglitz finds no statistical evidence that inflation
builds on itself but rather that when it has been rising it is likely to reverse
its course. He also finds that adjustment occurs in the economy in more
effective ways than is assumed by inflation hawks. He notes that we still
have an imperfect understanding of the way the economy works, and that
this should make us very cautious about prioritising inflation fighting above
all things. Inflation is not clearly detrimental to the economy, and pre-
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concert with the social partners, that is, labour and business, in keeping
down wage and price increases.32
In sum, the empirical work on delegation to independent central banks
casts doubt on the severity and nature of the problem purportedly solved by
delegation, that is, the pernicious effects of democracy on policy making,
particularly with regard to inflation, as well as raising questions about the
linkages between delegation and superior economic outcomes. This raises a
basic question. If the premise of delegation is that policy makers choose
these institutional forms, such as central bank independence, because they
anticipate superior economic outcomes in their country with delegation,
why might they continue to do so even if such evidence is not forthcoming?
The section below suggests an alternative explanation for the diffusion of
central bank independence.
W H Y D E L E G AT E ? T H E S O C I A L B A S I S O F D I F F U S I O N O F
O R G A N I S AT I O N A L F O R M S
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organisations both embody and shape broader social and cultural dynamics.
Therefore, central banks (as organisations) must be analysed in terms of the
broader social environment within which they are situated the ideas,
norms, and culture of the moment as it is this environment that profoundly
shapes their form and practices. By situating central bank independence
within a national or transnational culture of neoliberal economic policy
making, which privileges price stability as an absolute good, it is easy to see
why central bank independence, with its substantive bias towards low
inflation outcomes, is a rational strategy. Further, in an increasingly
globalised international financial market, central bank independence is one
way of signalling to investors a government is truly modern, ready to carry
out extensive reforms to provide a setting conducive to business.35 Note,
however, that this signal is understood as such even if the statistical
relationship between this organisational form and superior economic
outcomes may not be borne out in practice. Delegation to central banks is
thus a very rational adaptation to a specific cultural environment which
rewards certain organisational forms over others, in part because of the real
distributional effects that such delegation may provoke.
In this process of organisational diffusion, Scott and Meyer point out
that specific local functional needs may not be the central source of an
organisational structure, but rather designs are borrowed from other
environments and then applied locally despite important differences across
settings.36 For example, it may not be the specific circumstances of the
national economy that produces delegation to independent central banks,
but rather the template of the central bank may be suggested by other
national experiences that are perceived as successful. Thus, a country in the
depths of a recession may increase central bank independence even though
slow growth, not inflation, is the key policy challenge policy makers use
central bank independence to signal to investors that they are credibly
following a reformist path. The transfer of the template occurs therefore
even though there may be important discrepancies in the needs and contours
of the national political economies that make the replication of that success
unsure or unlikely.37 For example, a country such as Ecuador, without the
legal and political institutions to truly emulate independent central banks
such as the ECB, may rationally pursue this organisational design for its
symbolic properties although central bank independence ends up being
meaningless in practice.
Second, in the sociological institutional perspective, the causal
mechanisms driving the adoption of an organisational form, such as central
bank independence, work through constitutive or phenomenological aspects
and are socially constructed in conjunction with material circumstances. For
example, markets themselves do not speak: the signals that they send
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This article has so far articulated two quite different sets of arguments about
why delegation in the monetary realm might be a sensible choice. Although
the arguments make very different claims about the process by which
delegation occurs, they both predict similar outcomes of institutional
isomorphism, that is, the rise in central bank independence over time
demonstrated earlier in Figure 1. How can we therefore adjudicate
empirically between these explanations? Below, a series of hypotheses is
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offered for what we should observe given the two logics, material and
social, that drive the respective theories. Although a complete test of these
two approaches is not possible here, the purpose is to provide some
suggestive illustrations of the limits and potential of each explanation.
First, the purely functional approach implies that countries increase the
independence of the central banks because they believe delegation will
solve their economic problems, particularly high inflation. Although the
present article challenges the logic of this solution and the evidence that
independence produces superior outcomes, it may be that governments are
responding to a set of material circumstances for which central bank
independence is viewed as offering a rational solution, even if the actual
correctness of this analysis is flawed. Thus, empirically we should examine
whether or not the material economic circumstances in advance of the
decision to delegate do indeed match the conditions that independence is
meant to improve on. Most prominently, inflation rates should be
persistently high in advance of the decision to delegate.
Unfortunately, the empirical work on central banks has focused
overwhelmingly on the relationship between independence and economic
outcomes instead of analysing the sources of the policy of delegation, with
the exception of Maxfields seminal research.44 This is an important
oversight. Investigating the timing of moves to central bank independence
in light of national macroeconomic conditions might provide clues as to the
fit between the functionalist story or the social institutions one. Maxfields
study of the sources of central bank independence in emerging economies,
which focuses on the desire of developing states to signal their credibility to
international investors, notes that central bank independence and inflation
do not seem to have a close temporal relationship, arguing that inflation
was very severe in developing countries in the 1970s and 1980s, yet central
bank independence decreased in the 1970s and changed little in the 1980s.45
A thorough econometric analysis is needed to assess fully the
relationship between macroeconomic indicators and decision to increase
central bank independence. A rough and ready preliminary look at the data
on inflation, growth, and employment appears to demonstrate a mixed
relationship to delegation (see Appendix 1). What is clear is that there may
be strong regional trends in the data. The newly independent states of the
former Soviet bloc have all moved to independent central banks in the
context of sometimes extremely high inflation, but the macroeconomic
indicators for these states are sketchy at best. Policy makers assessment of
the economic necessity of central bank independence was short-circuited, as
the newly created banks were given immediate legal independence after the
break-up of the Soviet Union. A second regional trend is apparent in the
European Union member states, which moved to make their banks
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part determine these conditions, not all member governments have equal
say, either formally on the part of the IMF which awards votes in terms of
economic weight, or informally, in an EU where bargaining is never purely
symmetrical.
The second mechanism, normative isomorphism, can reinforce the first,
more coercive, one. Persuasion may occur through the development of
conceptual models, such as those promoting central bank independence
outlined in the first part of this article, which gain authority and legitimacy
by their advocacy on the part of prominent analysts. The models that
proscribe delegation to independent central banks derive from the discipline
of economics, which in the west is unified behind a single methodology and
intellectual cannon. These models are diffused through professionalised
networks of economists and economic policy makers and become
institutionalised in the IMF, or spread through shared education and
training, or through authoritative media sources and communities of
financiers and international investors.
The combination of coercive and normative pressure for conformity to
organisational form in the area of central banking are formidable. Hewing
to the precepts of central bank independence is thus a natural outcome for
transition states from the former Eastern Bloc, as the need to appear credible
and mimic the institutions of nations successful in stabilising their
economies is extremely pressing, driving institutional isomorphism
regardless of their particular local economic needs.51 Establishing legal
independence for their new central banks at the start of their transitions was
a way to legitimise the new regime and send a signal to allies, investors, and
international institutions that the government would play by the rules of the
global political economy. Developed states are not immune from these
processes either. For example, the Bank of Japan was made independent in
1996, after a multiple year recession that far from being marked by
inflation, has seen deflationary trends, with price increases hovering around
one per cent or below. The move to delegate monetary policy was taken as
a part of the Big Bang package of economic reform, which proposed a
variety of deregulatory actions in an effort to jump-start the Japanese
economy and move its political economy a little closer to that of the AngloSaxon model. Delegation was a rational choice in the context of the culture
of neoliberalism, but not to address the purported inflationary tendencies of
democracy as per the economic literature on central bank independence.
The European shift to central bank independence also challenges the
functional argument and points to the role of institutional diffusion of
organisational form. In the early 1990s, almost all of the EU countries with
dependent central banks moved to independence in anticipation of joining
EMU, for which such legal independence was a legal requirement. In 1992,
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be better understood as a social process that is highly political in its both its
sources and effects.
NOTES
For very helpful comments on this paper, I thank Nicholas Jabko, Keith Whittington, Mark
Thatcher, Alec Stone Sweet, participants in the workshop at the European University Institute,
and an anonymous reviewer. I also thank Sheri Berman for invaluable discussions on the topic of
democracy and central banking. Elizabeth Bloodgood provided excellent research assistance.
1. S. Maxfield, Gatekeepers of Growth: The International Political Economy of Central
Banking in Developing Countries (Princeton: Princeton University Press 1997), p.3.
2. K. Dyson, K. Featherstone and G. Michalopoulos, Strapped to the Mast: EC Central
Bankers between Global Financial Markets and Regional Integration, Journal of European
Public Policy 2/3 (Sept. 1995), pp.46587; Robert Elgie and Erik Jones, Agents, Principals
and the Study of Institutions: Constructing a Principal-Centred Account of Delegation,
Working Documents in the Study of European Governance 5 (Nottingham: The Centre for the
Study of European Governance, University of Nottingham Dec. 2000).
3. Reviews of the literature include T. Moe, The New Economics of Organization, American
Journal of Political Science 28 (1984), pp.73977; K. Shepsle and B. Weingast, Positive
Theories of Congressional Institutions, Legislative Studies Quarterly 19/149 (1994),
pp.14579.
4. M. Pollack, Delegation, Agency, and Agenda Setting in the European Community,
International Organization 51/1 (Winter 1997), pp.99134.
5. W. Nordhaus, The Political Business Cycle, Review of Economic Studies 42 (1975),
pp.16990; A. Alesina, Macroeconomics and Politics, in S. Fischer (ed.), NBER
Macroeconomics Annual 1988 (Cambridge: MIT Press 1988), pp.1369; A. Alesina,
Politics and Business Cycles in Industrial Democracies, Economic Policy 4 (April 1989),
pp.5798.
6. Alesina, Macroeconomics and Politics.
7. D.A. Hibbs, Political Parties and Macroeconomic Policy, The American Political Science
Review 71 (Dec. 1977), pp.146787; D. Cameron, The Expansion of the Public Economy:
A Comparative Analysis, The American Political Science Review 72 (Dec. 1978),
pp.124361.
8. The rational expectations approach argues that actors in the economy will catch on to the
manipulation of the money supply and will start to figure in the inflationary effects of
increased money supply into their wage demands, prices, and investment decisions. As they
do so, these inflationary expectations will themselves create inflation. See R.J. Barro and D.
Gordon, Rules, Discretion, and Reputation in a Model of Monetary Policy, Journal of
Monetary Economics 12 (July 1983), pp.10121; S. Lohmann, Optimal Commitment in
Monetary Policy: Credibility versus Flexibility, American Economic Review 82 (March
1992), pp.27386; A. Cukierman, Central Bank Strategy, Credibility and Independence:
Theory and Evidence (Cambridge: MIT Press 1992).
9. A. Alesina and G. Tabellini, Credibility and Politics, European Economic Review 32
(1988), pp.54250.
10. J. De Haan, The European Central Bank: Independence, Accountability and Strategy: A
Review, Public Choice 93 (1997), pp.395426, especially p.398.
11. The validity of the assumptions of rational expectations that underpins the central bank
independence logic constitutes a separate, additional critique. See C. Goodhart, Game
Theory for Central Bankers, Journal of Economic Literature 32 (March 1994), pp.10114.
An analysis of the ideological dimensions of the rational expectations approach is Ilene
Grabel, Ideology and Power in Monetary Reform: Explaining the Rise of Independent
Central Banks and Currency Boards in Emerging Economies, presented at a conference on
Power, Ideology, and Conflict: The Political Foundations of 21st Century Money, 31
March2 April 2000, Cornell University, Ithaca, NY. Grabel also stresses the distributional
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consequences of delegation.
12. J.E. Stiglitz, Central Banking in a Democratic Society, Economist 142/2 (1998),
pp.199226, quote p.216.
13. This can be characterised as a conflict between a traditional Keynesian view of
macroeconomic policy, which prescribes demand management through activist monetary
policy, and a more neoliberal monetarist view, which prescribes targeting inflation control as
the singular goal of a central bank. See P. Hall, The Movement from Keynesianism to
Monetarism, in S. Steinmo, K. Thelen and F. Longstreth (eds.), Structuring Politics (New
York: Cambridge University Press 1992); P. Hall, Policy Paradigms, Social Learning, and
the State, Comparative Politics 25/3 (April 1993), pp.27596; K. Dyson, Elusive Union:
The Process of Economic and Monetary Union in Europe (London: Longman 1994); and K.
McNamara, The Currency of Ideas: Monetary Politics in the European Union (Ithaca:
Cornell University Press 1998).
14. An exception is the societal analysis provided in J.B. Goodman, The Politics of Central
Bank Independence, Comparative Politics 23/3 (1991), pp.32949.
15. K. Rogoff, The Optimal Degree of Commitment to an Intermediate Monetary Target,
Quarterly Journal of Economics 100/4 (1985), pp.116989.
16. See Goodman, Central Bank Independence, especially pp.3346, on historical variations in
independence in European central banks.
17. E.g. R.D. Kiewert and M.D. McCubbins, The Logic of Delegation: Congressional Parties
and the Appropriations Process (Chicago: University of Chicago Press 1991), p.5. See Elgie
and Jones, Agents, Principals and the Study of Institutions.
18. M. McCubbins and T. Page, A Theory of Congressional Delegation, in M. McCubbins and
Terry Sullivan (eds.), Congress: Structure and Policy (New York: Cambridge University
Press 1987).
19. A. Posen, Why Central Bank Independence Does Not Cause Low Inflation: There Is No
Institutional Fix for Politics, in R. OBrien (ed.), Finance and the International Economy 7
(Oxford: Oxford University Press 1993).
20. J. Goodman, Monetary Sovereignty: The Politics of Central Banking in Western Europe (Ithaca:
Cornell University Press 1992); K.R. McNamara and E. Jones, The Clash of Institutions:
Germany in European Monetary Affairs, German Politics and Society 14 (Fall 1996), pp.531.
21. A. Drazen, The Political Business Cycle after 25 Years, in B. Bernake and K. Rogoff (eds.),
NBER Macroeconomics Annual, 2000 (Cambridge, MA: NBER 2000), pp.34. Drazen does
not address, however, a more nuanced and promising analysis, which incorporates the role
of domestic institutions and international capital mobility: W.R. Clark and M. Hallerberg,
Mobile Capital, Domestic Institutions, and Electorally Induced Monetary and Fiscal
Policy, American Political Science Review 94 (June 2000), pp.32346.
22. See K. McNamara, The Currency of Ideas, ch.6; G. Garrett, Partisan Politics in a Global
Economy (Cambridge: Cambridge University Press 1998).
23. Stiglitz, Central Banking. An earlier assessment of inflation along similar lines is B. Barry,
Does Democracy Cause Inflation? in L.N. Lindberg and C. Maier (eds.), The Political
Economy of Inflation and Economic Stagnation (Washington, DC: Brookings Institution
1985), pp.280317.
24. M. Bruno and W. Easterly, Inflation and Growth: In Search of a Stable Relationship,
Federal Reserve Bank of St. Louis Review 78 (MayJune 1996), pp.13946.
25. R.J. Barro, Determinants of Economic Growth (Cambridge: MIT Press 1997); S. Fischer,
The Role of Macroeconomic Factors in Growth, Journal of Monetary Economics 32/3
(1993), pp.485512.
26. Stiglitz, Central Banking, pp.21213.
27. Ibid., p.215.
28. E.g. Cukierman, Central Bank Strategy, Credibility and Independence; T. Persson and G.
Tabellini (eds.), Monetary and Fiscal Policy (Cambridge: MIT Press 1994); S. Eijffinger and
J. De Haan, The Political Economy of Central Bank Independence, Special Papers in
International Economics 19 (Princeton: International Finance Section, Princeton University
May 1996).
29. J. Forder, Central Bank Independence: Reassessing the Measurements, Journal of
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Country
Date of
Legal CBI
Five Years
Prior
1989
1988
1987
1986
1985
1984
Colombia
1992
1991
1990
1989
1988
1987
Ecuador
1992
1991
1990
1989
1988
1987
Mexico
1993
1992
1991
1990
1989
1988
Venezuela
1992
1991
1990
1989
1988
1987
Inflation
Growth
24.9
171.7
2314.7
3080.5
343.0
131.3
17.0
14.7
19.9
19.5
30.7
19.9
27.0
30.5
29.1
25.9
28.1
23.3
55.0
48.8
48.4
75.7
58.2
29.5
97.5
15.5
22.7
26.7
20.0
114.2
31.4
34.2
40.7
84.5
29.4
28.1
8.7
8.9
0.1
-6.2
-1.9
2.6
10.0
7.4
5.7
5.7
2.4
7.8
3.5
2.1
4.3
3.4
4.1
5.4
3.7
4.4
2.3
0.2
10.5
-6.0
2.0
3.6
3.6
4.4
3.3
1.2
7.3
10.4
6.5
-8.6
5.8
3.6
Unemployment
7.0
6.0
9.0
7.0
6.0
5.0
5.0
6.0
8.0
9.0
12.0
9.0
10.0
10.0
9.0
9.0
9.0
6.0
8.0
7.0
7.0
3.0
3.0
3.0
*
*
*
8.0
10.0
10.0
9.0
7.0
9.0
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A P P E N D I X 1 (Continued)
Country
Date of
Legal CBI
Five Years
Prior
Transitional Economies
Albania
1991
1990
1989
1988
1987
1986
Belarus
1994
1993
1992
1991
1990
1989
Bulgaria
1991
1990
1989
1988
1987
1986
1993
1992
1991
1990
1989
1988
Hungary
1991
1990
1989
1988
1987
1986
Kazahkstan
1993
1992
1991
1990
1989
1988
Latvia
1992
1991
1990
1989
1988
1987
Inflation
Growth
35.5
*
*
*
*
*
2200.0
1188.0
1074.5
94.1
*
*
333.5
21.6
6.4
2.5
2.7
2.7
20.8
11.0
59.0
10.8
1.4
0.2
89.0
1069.0
210.6
*
*
*
36.4
28.9
17.0
15.5
8.6
5.3
1662.3
2568.0
147.0
*
*
*
951.2
124.4
*
*
*
*
-27.7
-10.0
9.8
-1.4
-0.8
5.6
-13.2
-7.0
-9.7
*
*
*
-11.7
-9.1
-0.5
2.5
5.7
5.6
0.6
-8.5
-15.9
-0.4
4.5
2.5
-8.2
-23.3
-11.9
*
*
*
-11.9
-4.3
-0.2
-0.1
4.1
4.7
-9.2
-14.0
-13.0
*
*
*
-32.9
-8.3
*
*
*
*
Unemployment
9.0
10.0
7.0
7.0
6.0
6.0
2.0
1.0
1.0
0.0
*
*
11.0
2.0
*
*
*
*
4.0
*
*
*
*
*
8.0
5.0
2.0
1.0
1.0
*
9.0
2.0
*
*
*
*
1.0
1.0
0.0
*
*
*
2.0
*
*
*
*
*
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Country
Lithuania
Date of
Legal CBI
Five Years
Prior
1994
1993
1992
1991
1990
1989
Poland
1990
1989
1988
1987
1986
Romania
1991
1990
1989
1988
1987
1986
Russia
1993
1992
1991
1990
1989
1988
1992
1991
1990
1989
1988
1987
Advanced Economies
Belgium
1993
1992
1991
1990
1989
1988
France
1993
1992
1991
1990
1989
1988
Inflation
Growth
Unemployment
72.1
410.4
1020.3
224.7
*
*
70.3
585.8
251.5
60.2
25.2
17.8
161.1
4.7
0.9
2.6
1.1
0.7
874.7
1353.0
92.7
*
*
*
23.0
11.0
59.0
10.8
1.4
0.2
1445.3
91.2
*
*
*
*
-9.8
-16.2
-35.0
-13.4
*
*
-7.6
-11.6
0.2
4.1
2.0
4.2
-15.1
-7.4
-5.8
-0.5
0.8
2.3
-10.4
-18.5
-12.9
*
*
*
-3.7
-8.5
-15.9
-0.4
4.5
2.5
-14.0
-13.4
*
*
*
*
5.0
4.0
4.0
0.0
*
*
*
*
*
*
*
*
3.0
*
*
*
*
*
6.0
5.0
0.0
*
*
*
13.0
11.0
7.0
*
*
*
*
*
*
*
*
*
3.8
3.6
3.2
3.5
3.1
1.2
2.8
2.9
2.8
3.1
3.2
2.8
-1.5
1.6
1.6
3.0
3.6
4.7
2.7
2.2
1.2
2.2
4.1
4.5
8.8
7.3
7.0
7.0
8.0
10.0
11.6
10.3
9.3
8.9
9.4
10.0
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A P P E N D I X 1 (Continued)
Country
Greece
Date of
Legal CBI
Five Years
Prior
1993
1992
1991
1990
1989
1988
Italy
1992
1991
1990
1989
1988
1987
Portugal
1992
1991
1990
1989
1988
1987
Spain
1994
1993
1992
1991
1990
1989
New Zealand
1989
1988
1987
1986
1985
1984
Japan
1996
1995
1994
1993
1992
1991
Britain
1998
1997
1996
1995
1994
1993
Ireland
1998
1997
1996
1995
1994
1993
Inflation
14.5
14.8
19.5
20.4
13.7
13.5
5.6
7.3
7.5
6.2
6.7
6.0
10.6
11.4
13.4
12.6
9.5
9.4
3.8
4.3
6.9
5.9
6.7
6.8
7.5
6.4
15.7
13.2
15.4
6.2
-1.4
-0.6
0.2
0.6
1.7
1.9
2.9
2.9
3.3
2.5
1.5
2.8
5.6
3.5
2.3
2.7
1.7
5.2
Growth
-1.6
0.7
3.1
2.7
3.8
4.5
1.3
1.4
2.2
2.9
4.1
3.1
1.9
2.3
4.4
5.1
7.5
6.4
2.3
-1.2
0.7
2.3
3.7
4.7
0.9
-0.4
0.4
2.1
0.8
4.9
5.0
1.5
0.6
0.3
1.0
4.4
2.2
3.5
2.6
2.8
4.4
2.3
8.9
10.7
7.7
9.5
5.8
2.6
Unemployment
9.7
8.7
8.0
7.0
8.0
8.0
11.1
10.9
11.0
12.0
12.0
12.0
4.1
4.0
5.0
5.0
6.0
8.0
24.2
22.7
18.4
16.0
16.0
17.0
7.0
6.0
4.0
4.0
*
*
3.3
3.1
2.9
2.5
2.2
2.1
4.7
5.7
7.4
8.1
9.4
10.3
7.4
9.8
11.5
12.1
14.1
15.5
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Country
Finland
Date of
Legal CBI
Five Years
Prior
1998
Growth
Unemployment
1998
1997
1996
1995
1994
2.9
2.1
-0.2
4.1
2.0
2.3
1.9
2.0
1.1
1.8
2.3
1.9
0.5
1.3
1.2
1.4
3.5
2.4
5.0
6.3
4.0
3.8
4.0
-1.1
3.7
3.8
3.0
2.3
3.2
0.8
3.8
3.0
2.0
1.1
3.7
4.1
11.4
12.6
14.6
15.4
16.6
16.4
4.1
5.5
6.6
7.1
7.6
6.5
5.6
6.5
8.0
8.1
7.7
8.0
22.8
16.7
9.2
5.9
5.9
14.0
13.6
19.8
16.7
21.4
18.8
19.7
63.3
75.4
38.8
34.6
45.0
48.3
9.8
9.4
11.7
9.7
7.2
3.3
25.0
67.0
67.0
35.0
394.0
316.7
0.2
-1.4
4.9
-1.9
-0.7
-0.2
0.4
1.2
2.3
2.2
3.5
8.7
-0.3
4.4
7.2
8.7
4.5
6.3
1.9
7.8
7.7
5.6
4.7
4.8
5.0
4.0
5.1
8.1
5.1
2.5
21.0
20.0
17.0
*
*
*
9.0
10.0
9.0
7.0
*
*
9.0
8.0
*
*
11.0
*
5.0
6.0
6.0
3.0
3.0
3.0
*
*
*
*
*
*
1997
1996
1995
1994
1993
Netherlands
1998
1997
1996
1995
1994
1993
Inflation
Sweden
1999
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