Opportunistic, not Optimal Delegation: The Political Origins of Central Bank Independence
(with Julia Gray and Jakob Willisch)
Economists have long argued that central banks ran by technocrats have greater policy independence from the government. But in many countries, politically experienced central bankers are at the helm, including those banks that are highly independent. To explain why, we develop a formal model where central bank nominees are screened for their political ambitions and show how screening and reelection efforts by the nominating official changes the level of policy discretion awarded to different types of candidates. We predict that technocrats get higher levels of policy discretion than nominees with political experience, but as the appointing official faces tougher reelection, those candidates with political experience get higher policy discretion as well. We test our theory using new data from 29 post-communist countries between 1990-2012. We find evidence that the reelection strategy of the nominating official is an important predictor of the level of policy discretion awarded.