Central Bank Independence, Political Economy, Signaling
339 Makroökonomie und verwandte Themen 337 Internationale Volkswirtschaft
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From a normative perspective, it is striking that the degree of central bank independence (CBI)
varies considerably across countries. Taking a political economy perspective, this paper
demonstrates how different degrees of CBI may be the result of ‘strategic policy-making’.
While an independent central bank reduces the incumbent politician’s chances to influence
current monetary policy it also raises the costs of future policy changes for political
successors. Hence, when deciding on the degree of CBI, incumbent politicians face a trade-off:
current influence on monetary policy versus policy durability. This paper shows how various
factors change this trade-off and hence the institutional choice. The model predicts that the
level of CBI incumbent politicians choose will increase in politicians’ ability to screen central
bankers’ preferences, in the degree of political polarization, and in the weight politicians place
on future policy outcomes. In contrast, the likelihood for the implementation of an
independent central bank decreases in the re-election prospects of incumbents and in the
utility central bankers receive from holding office.
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