Opportunistic, not Optimal Delegation: The Political Origins of Central Bank Independence

• DOI: 10.1177/0010414020957679
• Date: 01 May 2021
• Published date: 01 May 2021
• Subject Matter: Articles

https://doi.org/10.1177/0010414020957679

Comparative Political Studies

2021, Vol. 54(6) 956 –988

© The Author(s) 2020

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DOI: 10.1177/0010414020957679

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Article

Opportunistic, not

Optimal Delegation:

The Political Origins

of Central Bank

Independence

Nicole Rae Baerg1, Julia Gray2,

and Jakob Willisch3

Abstract

Economists have long argued that central banks ran by technocrats have

greater independence from the government. But in many countries,

politically experienced central bankers are at the helm, including even

highly independent central banks. To explain the level of central bank

independence awarded, we develop a formal model where nominating

politicians screen central bankers for their political ambitions. We show

how screening and reelection efforts by the nominating politician changes

the level of autonomy associated with different types of candidates. We

predict that technocrats are associated with higher levels of independence

than nominees with political experience, but as the appointing politician

faces tougher reelection, candidates with political experience are associated

with higher independence as well. We test our theory using new data from

29 post-communist countries between 1990 and 2012. We find evidence

that the reelection strategy of the nominating politician is an important

predictor of the level of central bank independence.

1University of Essex, Colchester, UK

2University of Pennsylvania, Philadelphia, PA, USA

3University of Mannheim, Mannheim, Germany

Corresponding Author:

Nicole Rae Baerg, University of Essex, Wivenhoe Park, Colchester CO43SQ, UK.

Email: nicole.baerg@essex.ac.uk

957679CPSXXX10.1177/0010414020957679Comparative Political StudiesBaerg et al.

research-article2020

Baerg et al. 957

Keywords

political economy, delegation, central banks, formal theory, post-soviet

countries

Introduction

Economists have long argued that central bank independence (CBI) protects

citizens from opportunistic governments. They believe that appointing a

politically independent, technocratic central banker can shield the economy

from expectations driven inflation. Puzzling, however, is that while the level

of CBI is increasing globally (Garriga, 2016), we continue to see even highly

independent central banks helmed by central bank governors (CBGs) with

political experience. What explains the co-occurrence of rising CBI and

politically experienced central bankers? What role do the electoral strategies

of the appointing politician play in how much policy independence is

delegated?

According to the standard delegation story, the government gives up mon-

etary policy autonomy to independent experts with inflation aversion (Barro

& Gordon, 1983; Bodea & Higashijima, 2017; Rogoff, 1985) so as to credi-

bly commit to low inflation.1 Research suggests that delegation works best in

democracies (Bearce and Hallerberg, 2011; Bodea and Higashijima, 2017;

Broz, 2002). But even in non-democracies, handing over monetary authority

to bureaucratic experts, or technocrats, can help save the economy from eco-

nomic cycles, especially if power is shared with elites through dominant par-

ties (Bodea et al., 2017). With its focus on credibility, previous explanations

ignore the possibility that central bankers themselves may have ambitions for

elected office and consequently, those individuals appointing central bankers

have incentives to screen central bank candidates for their electoral ambitions

as well as for their policy preferences. For example, we observe a number of

cases where the heads of even highly independent central banks have politi-

cal careers. In the Czech Republic, the first governor of the newly indepen-

dent central bank, Josef Tošovský, also served as the country’s prime minister

in 1998, subsequently going back to head the central bank until 2000. Later,

CBG Jiří Rusnok acted as the country’s prime minister from 2013 to 2014

(Petříček, 2016). Furthermore, at times, central bank appointments to candi-

dates with political backgrounds coincide with increases, not drops, in policy

autonomy. For example, in Ukraine in 2010, CBG Volodymyr Stelkmakh was

pressured to resign to make way for Serhiy Arbuzov and formal central bank

independence rose rather than declined, despite Arbuzov’s political back-

ground. Arbuzov had unsuccessfully ran for the Donetsk Regional Council

prior to his appointment. After being CBG, Arbuzov went on to have a

958 Comparative Political Studies 54(6)

prominent political career, serving as vice–prime minister and then prime

minister (BBC Monitoring: International Reports, 2011; Dpa International,

2010).

We consider how the reelection efforts of the politician with appointment

powers to the central bank affects the level of policy independence the central

bank has. First, we show how the level of policy independence a politician

awards depends on how easy or hard it is for the appointing politician to

identify a candidate’s electoral threat level. When the appointer is relatively

uncertain about the political ambitions of the CBG, the nominating politician

commits resources to deter any politically minded CBG candidates from dis-

guising their political ambitions. Consequentially, candidates whose biogra-

phy shows no inclination toward holding political office are more likely to be

awarded greater levels of independence than those with past political experi-

ence. Second, as the appointing politician becomes more electorally insecure,

it becomes less efficient for her to commit resources to deterring politically

interested CBG candidates, as additional effort spent on screening candidates

will not increase her chance of winning the election relative to other reelec-

tion tactics. Thus, under these conditions, the nominating politician expends

relatively less effort on screening CBG candidates for their political aspira-

tions and consequently awards similar levels of policy independence to can-

didates irrespective of whether they held political office before or not.

Our mechanism is analogous to traditional labor market screening models.

Consider a situation where an employer does not know a job seeker’s true

ability and would like to screen out candidates of low ability. The pool of

candidates that the prospective employer faces, however, can vary. If the

unemployment rate is relatively high, resulting in a wealth of candidates from

which to choose, it is efficient for the employer to spend resources on sorting

out candidates of low quality. Alternatively, if all job candidates are expected

to be of low quality, or the labor market is competitive, it is less efficient for

the employer to invest in screening candidates. One consequence is that even

low-ability candidates may get higher wages. In parallel, when all CBG can-

didates are politically ambitious or if the appointing politician is electorally

vulnerable, screening no longer “pays,” and even politically ambitious CBG

candidates are awarded relatively higher levels of policy autonomy as well.

Our main empirical expectation is that under conditions of electoral com-

petition, CBGs with political experience are awarded higher levels of policy

autonomy than the same candidates would be if the nominating politician was

more electorally secure. We test our argument using original data from 29

post-communist countries between 1990 and 2012. As noted by Bodea

(2013), the post-communist countries not only represent an empirical domain

where economic and political changes occurred simultaneously, they also are