Bankers, Bureaucrats, And Central Bank Politics: The Myth Of Neutrality (cambridge Studies In Comparative Politics)

Most studies of the political economy of money focus on the laws protecting central banks from government interference; this book turns to the overlooked people who actually make monetary policy decisions. Using formal theory and statistical evidence from dozens of central banks across the developed and developing worlds, this book shows that monetary policy agents are not all the same. Molded by specific professional and sectoral backgrounds and driven by career concerns, central bankers with different career trajectories choose predictably different monetary policies. These differences undermine the widespread belief that central bank independence is a neutral solution for macroeconomic management. Instead, through careful selection and retention of central bankers, partisan governments can and do influence monetary policy - preserving a political trade-off between inflation and real economic performance even in an age of legally independent central banks. Bankers, Bureaucrats, and Central Bank Politics: The Myth of Neutrality 6 Contents 10 List of figures 11 List of tables 14 List of boxes 16 Abbreviations 18 Acknowledgements 20 1 Agents, institutions, and the political economy of performance 26 Interests and Institutions in Comparative Political Economy 28 Agents, Institutions, and Change 31 Bringing Bureaucrats Back In 34 A Career Paths Approach to Bureaucrats’ Preferences 40 Central Banks and Short-Run Economic Performance 45 Plan of the Book 50 2 Career theories of monetary policy 52 Do We Really Need to Study Central Bank Conservatism? 53 Career and Policy Choices of Bureaucrats 57 Career Incentives for Monetary Policy Making 62 Career socialization and monetary policy 64 Career Models of Monetary Policy Delegation 66 Empirical Implications of the Models 79 Broader Implications for the Study of Bureaucracy 80 Theory Appendix to Chapter 2 81 Economic Assumptions 81 Model 1: Self-Selection 82 Model 2: Career Socialization 83 Model 3: Policy Signals 83 Signaling Equilibria 87 Model 4: Job-for-Policy Bargains 88 Play of the Game 90 Implicit Contracts Equilibrium 91 3 Central banker careers and inflation in industrial democracies 95 Measuring Career Effects 95 Central Bankers’ Careers: Data 99 The Revolving Door at the Central Bank 105 Career Effects and the Level of Inflation 109 Robustness of Career Effects on Inflation 114 Career Effects on Monetary Policy: Native and Induced Preferences 120 The Evolving Role of Career Effects on Monetary Policy 124 Time-Varying Accounts of Career Effects on Inflation 125 Conclusions 128 Methods Appendix to Chapter 3 129 Compositional Covariates in Regression Models 129 Formulating Counterfactuals for Compositional Covariates 132 Data Appendix to Chapter 3 134 Sources of Data 134 Descriptive Statistics 136 4 Careers and the monetary policy process: Three mechanism tests 141 The Policy Mechanism: Short-Run Real Interest Rates 142 Reaction Function Models of Monetary Policy 142 Adding Career Effects to Reaction Functions: Hypotheses and Specification 146 Data and Methods 147 Results: Career Effects in Interest Rate Policy 149 Career Incentives and Individual Behavior: Dissenting Votes in the Federal Open Market Committee 153 Modeling Dissenting Votes 155 Results: Dissenting Votes 157 Modeling Revealed Interest Rate Targets 161 Results: Revealed Interest Rate Targets 162 Conclusions 164 Data Appendix to Chapter 4 166 5 Careers and inflation in developing countries 168 Central Banking in Developing Countries 169 Central Banker Turnover: Behavioral Independence or Political Outcome? 174 Career Effects in Developing Countries 176 Data 179 Central Banker Career Data 179 Central Banker Education Data 182 Other Variables 183 Methods 185 Estimation 185 Inflation Results 186 Career Conservatism and Inflation: A First Cut 186 Robustness checks and regional differences 191 Career Effects on Inflation in Institutional Context 194 Conclusions 196 Data Appendix to Chapter 5 198 Hyperinflation sensitivity analysis 198 6 How central bankers use their independence 207 The Institutional Interactions Approach to Monetary Policy 208 Career Effects on Monetary Policy in Institutional Context 213 Methods 217 Inflation Analysis 217 Unemployment Analysis 220 Conclusion 225 Data Appendix to Chapter 6 227 7 Partisan governments, labor unions, and monetary policy 230 The Conditional Political Economy of Economic Performance 231 Unions 232 Central Banks 232 Partisan Governments 233 Partisan Governments and Unions 233 Unions and Central Banks 235 Partisan Governments, Unions, and Central Banks 235 Formalizing the Argument: Wage Restraint for Sale 237 Testing Competing Views of the Interactive Politics of Performance 242 Data and Methods 242 Variables 244 Results 246 Conclusions 254 Theory Appendix to Chapter 7 256 Sequence of Play and Economic Assumptions 256 Players 257 Equilibrium 258 Comparative Statics 260 Data Appendix to Chapter 7 262 Data and Sources 262 8 The politics of central banker appointment 265 What We Know About Central Bank Appointments: Studies of the Fed 269 Rational Partisan Appointment of Central Bankers 270 Data 274 Methods 276 Defining the Sample of Appointments 276 Visualizing Compositional Data 277 Estimation 279 Interpreting Results 280 Model Specification 280 Evidence of Partisan Appointment of Central Bankers 281 Conclusion 288 Theory Appendix to Chapter 8 290 Methods Appendix to Chapter 8 293 Aitchison’s Model of Compositional Data 293 Structural Zeroes in Compositional Data Analysis 294 Zeroes-Included Compositional Data Analysis 296 Further Refinements 298 Data Appendix to Chapter 8 300 Sources and Summaries 300 9 The politics of central banker tenure 305 Are Long-Serving Central Bankers More Effective? 306 Problems with Tenure as a Proxy of Independence 313 The Politics of Central Banker Survival 315 Data 317 Methods 320 Results 321 Conclusions 327 10 Conclusion: The dilemma of discretion 329 Monetary Policy and Shadow Principals in the United States and Europe 331 Agent-Centered Political Economy 340 References and Author Index 344 Subject index 368 About the type, figures, and data 383 Back Matter 384 1. Agents, institutions, and the political economy of performance 2. Career theories of monetary policy 3. Careers and inflation in industrial democracies 4. Careers and the monetary policy process 5. Careers and inflation in developing countries 6. The uses of autonomy: what independence really means 7. Partisan governments, labor unions, and monetary policy 8. The politics of central banker appointment 9. The politics of central banker tenure 10. Conclusion: the dilemma of discretion. Economists emphasize the role central banks' independence plays in achieving good economic outcomes. Using game theory and data from dozens of countries, Adolph illustrates that central bankers with different career trajectories choose different monetary policies. Central banks run by former bankers favor low inflation, whereas bureaucrats support low unemployment.