A political explanation of variations in Central Bank independence
By: BERNHARD, William
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ArticlePublisher: New York, NY : Cambridge University Press, June 1998American Political Science Review 92, 2, p. 311-328Abstract: Across the industrial democracies, central banks perform a similar function: to implement the government's monetary policy by regulating the supply of money and credit to the economy. Nevertheless, the structures of these bureaucratic institutions - their levels of independence - differ across systems. This variation presents a puzzle. On the one hand, independent central banks limit the ability of governments to manipulate monetary policy for their own short-term gain, which implies that governments would never choose an independent central bank. On the other hand, empirical research demonstrates that independent central banks are associated with superior inflation performance, which suggests that all countries would have an independent bank to improve their economies (Alesina 1989; Alesina and Summers 1993; Burdekin and Willett 1991; Grilli, Masciandaro, and Tabellini 1991; Havrilesky and Granato 1993; Neumann 1991).
Across the industrial democracies, central banks perform a similar function: to implement the government's monetary policy by regulating the supply of money and credit to the economy. Nevertheless, the structures of these bureaucratic institutions - their levels of independence - differ across systems. This variation presents a puzzle. On the one hand, independent central banks limit the ability of governments to manipulate monetary policy for their own short-term gain, which implies that governments would never choose an independent central bank. On the other hand, empirical research demonstrates that independent central banks are associated with superior inflation performance, which suggests that all countries would have an independent bank to improve their economies (Alesina 1989; Alesina and Summers 1993; Burdekin and Willett 1991; Grilli, Masciandaro, and Tabellini 1991; Havrilesky and Granato 1993; Neumann 1991).
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