2 - Legislation Alone Does Not a Central Bank Make: Political Structure, Governance, and Reputation in Monetary Policy

Summary

INTRODUCTION

One of the aims of this book is to blend purely economic analyses of central bank behavior since the end of World War II with what has been learned in related literatures in the political economy and public choice areas. In so doing some familiar ground is covered. However, the various strands of the literature referred to above have taken divergent paths, particularly over the last decade. While this outcome is perhaps understandable, given the complexity of the issues under discussion, it is also one that is profoundly unsatisfactory. In discussions about central bank independence in recent years many observers have lost sight of the fact that monetary policy is ultimately a joint responsibility of the government and the central bank, no matter how much autonomy is permitted by statute. As a result, there may be a connection between a particular political structure, autonomy, and the performance of a central bank.

More surprisingly, there has been relatively less discussion about the process by which decisions are made by central banks. Instead, economics has been preoccupied with the relative importance of inflation versus other potential objectives the monetary authority may pursue and their connection with interest rate developments especially. Consequently, governance issues have yet to make their mark in our understanding of central bank behavior, a significant lacuna already noted in Chapter 1.

An important feature of later chapters of this book is the resort to macroeconomic and institutional data from a cross section of countries.