Abstract
The purpose of this paper is to investigate why politicians around the world have chosen to give up power to independent central banks, thereby reducing their ability to fine-tune the economy. A new data-set covering 132 countries, of which 86 countries had implemented such reforms, was collected. Politicians in non-OECD countries were more likely to delegate power to independent central banks if their country has been characterized by a high variability in historical inflation and if they faced a high probability of being replaced. No such effects were found for OECD countries.
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Notes
The countries for which information on CBI reforms is still missing, and the dates when CBI reforms occurred and sources that were used to verify them can be found in an online appendix at http://www.hui.se/forskning/hui-working-papers, see HUI Working Paper No 13.
The sum of principal repayments and interest actually paid in foreign currency, goods, or services on long-term debt, interest paid on short-term debt, and repayments (repurchases and charges) to the IMF, as a percentage of exports of goods services and income. The variable is obtained from the Quality of Government Dataset (Teorell et al. 2009).
Liquid liabilities include currency as well as demand and interest-bearing accounts of banks and other financial intermediaries.
We also tried lagging all the economic variables two or three periods, but all qualitative results remained the same. The results are available from the authors upon request.
Fixed and random-effects Logit models, as well as linear probability models with random effects, gave similar results.
Actual unemployment tends to follow the natural rate of unemployment (Elmeskov 1994) and is therefore used as a proxy.
The values λ = 0.94, and λ = 0.5 gave similar results.
Different lag structures for the inflation variable (two to five periods) were also tested, but rendered insignificant results.
We have also estimated a model where we included a dummy for countries that were prospective members of the European Monetary Union and a dummy for new countries during the study period (often created with relatively independent central banks). Both these variables are positive and statistically significant at the 5 % level, and the results can be obtained from the authors upon request. However, all the results presented in Table 4 are qualitatively the same.
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We would like to thank Jeroen Klomp, Karl-Gustaf Löfgren, Niklas Rudholm, and seminar participants at Sveriges Riksbank, Örebro University and the annual conference of the Midwest Political Science Association for valuable comments.
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Daunfeldt, SO., Hellström, J. & Landström, M. Why Do Politicians Implement Central Bank Independence Reforms?. Atl Econ J 41, 427–438 (2013). https://doi.org/10.1007/s11293-013-9391-1
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DOI: https://doi.org/10.1007/s11293-013-9391-1