Abstract
Doubts about the ability of elected representatives to resolve public policy issues and disillusion with their record have often led Constitutional framers to delegate decision making authority to independent bodies like central banks and judiciaries. Indeed, the development of the legal and the monetary system are closely interconnected: The successful operation of markets is founded on the rule of law and monetary stability. Both, however, are threatened by opportunistic governments which may violate the rights of citizens and generate inflation to pursue their own objectives. Application of the law and monetary stability require that credible constraints are imposed on the discretionary powers of the government.
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Notes
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This is illustrated by the case of the central bank of Belarus; although the bank is endowed with a high degree of independence, after inflation increased dramatically, the finance minister whose policies were the cause of inflation had the president of the central bank jailed (reported in Hayo and Hefeker 2002, who quote an earlier study of Hillman).
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As financial intermediaries borrow short and lend long, they may suffer heavy losses with inflation-induced changes in interest differentials. Moreover, as inflation will eventually be followed by contraction, financial intermediaries may suffer additional losses from failing borrowers.
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This injunction was first made by Mueller (1996): “An explanation of the objectives of the judiciary remains one of the great lacunae in the public choice – rational choice literature. This lacunae hampers greatly the development of incentives to induce the judiciary to pursue normative goals like advancing citizens interests” (p. 294, emphasis in the original).
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For example, Kaufmann et al. (2005) include indicators of fear, frequency, and violence of crime; trust in the police; the effectiveness and the predictability of the judiciary including fairness of judicial process, its speed and trust of it; and the enforceability of contracts and protection of rights.
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Popular election of judges for some lower courts takes place in a number of American states, see Hanssen (2004b) for a detailed investigation of judicial selection procedures; there are no cases of popular election of central bankers.
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For example, keeping secret the voting record of judges may have some advantages in supranational judicial bodies like the Court of Justice of the EU. Secrecy protects judges against possible retribution from governments which lost their cases at the Court.
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- 10.
Cukierman et al. (1992) recognize that a low turnover does not necessarily mean that the central bank is more independent, as a governor who tows the government line may stay longer in office. The issue of how likely it is that a CB governor will be replaced after a change in government is further studied in Cukierman and Webb (1995).
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Similarly, using the GMT index of CBI (Grilli et al. 1991) for 17 developed countries yields an insignificant correlation coefficient of 0.0414 with a t-statistic of 0.1605.
- 12.
When the exercise was rerun using the Governor Turnover index for 42 developing economies of De Haan and Kooi (2000) the coefficient of correlation was −0.0384 with a t-ratio of −0.2431, that is, it has the expected negative sign but is statistically insignificant.
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Tridimas, G. (2011). Comparison of Central Bank and Judicial Independence. In: Marciano, A. (eds) Constitutional Mythologies. Studies in Public Choice, vol 23. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-6784-8_11
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