The Limits of Delegation: Veto Players, Central Bank Independence, and the Credibility of Monetary Policy

Using J-tests, we rejected the GDP specification in favor of the original specifications in Table 1 regressions 2-4.

“Using J-tests first proposed by Davidson and MacKinnon (1981), we rejected the GDP specification in favor of the original specifications in Table 1 regressions 2-4.”

• cites Davidson and MacKinnon (1981) sourceSupported

Political replacements of central bank governors are less likely in the presence of multiple political veto players.

“we find evidence supporting the following predictions: delegation is more likely to enhance credibility and political replacements of central bank governors are less likely in the presence of multiple political veto players; this effect increases with the polarization of veto players.”

Multiple veto players can increase credibility (reduce inflation).

“These tests use new data both on political institutions and on political polarization and show that multiple veto players can increase credibility (reduce inflation)”

Legal central bank independence is more likely to reduce inflation in the presence of multiple political veto players.

“that legal central bank independence is more likely to reduce inflation in the presence of multiple political veto players”

Delegation to an independent central bank is more likely to enhance credibility in the presence of multiple political veto players.

“we find evidence supporting the following predictions: delegation is more likely to enhance credibility and political replacements of central bank governors are less likely in the presence of multiple political veto players; this effect increases with the polarization of veto players.”

All of these effects strengthen when political veto players are more polarized.

“and that all of these effects strengthen when political veto players are more polarized.”

The effect of multiple political veto players on delegation's credibility enhancement increases with the polarization of veto players.

“we find evidence supporting the following predictions: delegation is more likely to enhance credibility and political replacements of central bank governors are less likely in the presence of multiple political veto players; this effect increases with the polarization of veto players.”

If the agenda setter is the veto player who has the least incentive to renege on policy commitments (most inflation-averse), the addition of a second veto player has little effect on credibility.

“Third, policy credibility is sensitive to the decision making rules.If the agenda setter is the veto player who has the least incentive to renege on policy commitments (in this case, is most inflation-averse), the addition of a second veto player has little effect on credibility.”

The addition of a second veto player always reduces expected inflation provided interests of the two veto players are divergent.

“The addition of a second veto player always reduces expected inflation provided interests of the two veto players are divergent; as the third result predicts, this effect is much stronger when the non-agenda setter is less inflation tolerant than the agenda setter.”

Veto players matter less in a more uncertain environment.

“Veto players matter less in a more uncertain environment.”

The difference in inflation outcomes grows as polarization between the two veto players grows.

“the difference in inflation outcomes grows as polarization between the two veto players grows”

The interaction term CBI * log check is negative.

“the interaction term CBI * log check is negative”

An increase in central bank independence is estimated to have a negative effect on inflation only at high levels of checks and balances.

“an increase in central bank independence is estimated to have a negative effect on inflation only at high levels of checks and balances”

In each case, an independent central bank achieves lower inflation than two veto players alone.

“In each case, an independent central bank achieves lower inflation than two veto players alone”

Delegation of monetary policy to a more conservative central banker always lowers expected inflation when there are multiple veto players.

“First, delegation of monetary policy to a more conservative central banker always lowers expected inflation when there are multiple veto players.”

Legal central bank independence has no significant impact on inflation when it enters linearly in a sample including both OECD and developing countries.

“legal central bank independence has no significant impact on inflation when it enters linearly in a sample including both OECD and developing countries”

The threshold political polarization >0.6 corresponds roughly to the mean value of political polarization for the group of countries in which political polarization is not equal to 0.

“This corresponds roughly to the mean value of political polarization for the group of countries in which political polarization is not equal to 0.”

The central banker is able to pursue a lower inflation policy as polarization of the political actors increases.

“Second, the central banker is able to pursue a lower inflation policy as polarization of the political actors increases.”

In each case an independent central bank reduces inflation only where multiple veto players are present.

“The table provides additional evidence that in each case an independent central bank reduces inflation only where multiple veto players are present, as the theory predicts.”

The larger the variance of the supply shock, and therefore the greater the uncertainty surrounding the default or status quo outcome, the less influential is the non-agenda setter in setting policy.

“First, the larger is the variance of the supply shock, and therefore the greater the uncertainty surrounding the default or status quo outcome, the less influential is the non-agenda setter in setting policy.”

Openness is significantly and negatively correlated with inflation.

“openness is significantly and negatively correlated with inflation”

The variable political constraints is significant, economically and statistically, when substituted for log checks in the Regression 1 specification.

“The variable political constraints is similarly significant, economically and statistically, when substituted for log checks in the Regression 1 specification.”

The effect of adding a second veto player is much stronger when the non-agenda setter is less inflation tolerant than the agenda setter.

“The addition of a second veto player always reduces expected inflation provided interests of the two veto players are divergent; as the third result predicts, this effect is much stronger when the non-agenda setter is less inflation tolerant than the agenda setter.”

If the two veto players have identical preferences, the second veto player has no influence at all on outcomes.

“Of course, if the two veto players have identical preferences (b 1 = b 2 ), the second veto player has no influence at all on outcomes.”

The effect of central bank independence on inflation is conditional on the presence of checks and balances in government.

“Regression 2 suggests that the effect of central bank independence on inflation is conditional on the presence of checks and balances in government.”

The addition of an independent central bank makes the most difference when the agenda setter is more tolerant of inflation.

“Third, just as the addition of a second veto player makes the most difference when the agenda setter is more tolerant of inflation, so too does the addition of an independent central bank.”

• Also stated in: § The introduction of an independent central bank · plain

  “the biggest impact of an independent central bank occurs when the agenda setter is more inflation-tolerant.”

In the reverse situation, where the non-agenda setter is less inflation tolerant than the agenda setter, multiple veto players have a significant effect on policy credibility.

“In the reverse situation, multiple veto players have a significant effect on policy credibility.”

An increase in tenure protections CEO reduces governor turnover only in the presence of multiple veto players (or polarized veto players in the case of political polarization).

“An increase in tenure protections CEO reduces governor turnover only for in the presence of multiple veto players (or polarized veto players in the case of political polarization).”

The CBI * checks interaction terms generally retain their significance when CBI * openness is added to the Table I specifications.

“the CBI * checks interaction terms generally retain their significance.”

Political interference with central banks is less frequent in countries with multiple veto players having divergent preferences.

“Political interference with central banks is less frequent in countries with multiple veto players having divergent preferences.”

In the log inflation regression, the interaction between central bank independence and political polarization has a negative coefficient of -1.95 (SE 0.78).

“CBI*political polarization -1.95 (0.78)”

The impact of checks and balances on inflation (credibility) is greater in more polarized societies.

“the impact of checks and balances on inflation (credibility) is greater in more polarized societies.”

In the central bank governor turnover regression, the interaction between CEO and political constraints has a negative coefficient of -0.762 (SE 0.323).

“CEO*polcon -.762 (.323)”

Political instability does not explain the results linking checks and balances to inflation and central bank governor turnover.

“It might also be argued that political instability explains our results: countries that exhibit checks and balances are less stable, and it is their instability, rather than checks and balances, that generates our results.The evidence suggests that this is not the case, however.”

An interaction term openness*CBI does not affect the results in Table 1.

“We find that an interaction term opennesss*CBI does not affect the results in Table 1.”

In the log inflation regression, the interaction between central bank independence and log checks has a negative coefficient of -3.16 (SE 1.48).

“CBI * log check -3.16 (1.48)”

Central bank governor turnover is reduced when governors have tenure protections supported by political checks and balances.

“the turnover of central bank governors is reduced when governors have tenure protections supported by political checks and balances.”

The CBI * openness interaction term is never significant in the Table I specifications.

“we added the interaction term CBI * openness to the Table I specifications and found that it was never significant.”

The correlation between three measures of political instability and the checks variable is slightly positive in two cases and negative in a third.

“the correlation between three measures of political instability and the checks variable (all from the Database of Political Indicators) is slightly positive (7 percent) in two cases, and negative (-17 percent) in a third case.”

The results in Table 1 are robust to controls for serial correlation (inclusion of log inflation, lagged one period).

“However, the results in Table 1 are robust to controls for serial correlation (that is, the inclusion of log inflation, lagged one period).”

In the log inflation regression, the interaction between central bank independence and political constraints has a negative coefficient of -5.10 (SE 1.52).

“CBI*polcon -5.10 (1.52)”

Central banks are associated with lower inflation (greater credibility of government monetary policy) in the presence of checks and balances.

“Central banks are associated with lower inflation (that is, greater credibility of government monetary policy) in the presence of checks and balances”

Where there is greater uncertainty about which status quo will prevail in the future, additional veto players have less effect on credibility.

“For example, we find that where there is greater uncertainty about which status quo will prevail in the future, additional veto players have less effect on credibility.”

During the Gürzenich Affair of 1955-56, the German Bundesbank was able to insist on a course of action strongly opposed by Chancellor Konrad Adenauer precisely because members of his cabinet, Ludwig Erhard and Fritz Schäffer, supported the central bank.

“For example, during the Gürzenich Affair of 1955-56, the German Bundesbank was able to insist on a course of action strongly opposed by Chancellor Konrad Adenauer precisely because members of his cabinet, Ludwig Erhard and Fritz Schäffer, supported the central bank.”

• cites Berger and de Haan (1999)Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

The possibility of unpredictable economic shocks can motivate the inflation-averse veto player to delegate authority.

“The possibility of unpredictable economic shocks can, however, motivate the inflationaverse veto player to delegate authority.”

Delegation changes policy only in the presence of multiple veto players.

“A brief illustration based on Figure 1 is sufficient to show that delegation changes policy only in the presence of multiple veto players.”

The relationship between legal central bank independence and inflation has not been documented in samples that include both developed and developing countries.

“However, this relationship has not been documented in samples that include both developed and developing countries (Cukierman, Webb, and Neyapti, 1992).”

• cites Cukierman, Webb, and Neyapti, 1992Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

Many governments inherit central bank legislation approved by earlier governments, frequently earlier governments controlled by inflation-averse political parties that established a central bank fearing a future in which more inflation-tolerant parties might take office.

“As a factual matter, moreover, many governments inherit central bank legislation approved by earlier governments, frequently earlier governments controlled by inflation-averse political parties that established a central bank fearing a future in which more inflation-tolerant parties might take office.”

The presence of a conservative central banker who prefers a lower rate of inflation than either veto player can reduce inflation.

“The presence of a”

The central bank has an effect on policy to the extent that it can change the default or status quo rate of inflation relative to what would prevail in its absence.

“The central bank has an effect on policy, therefore, to the extent that it can change the default or status quo rate of inflation relative to what would prevail in its absence.”

In the absence of a central bank, policy does not shift from the status quo when there are two veto players and no policy that the agenda setter could propose that both prefer to the status quo.

“In the absence of a central bank, policy does not shift from sq since there is no policy that v 2 could propose that both she and v 1 prefer to sq.”

Delegation in the presence of economic shocks yields inflation outcomes closer to the preferred outcome of v1.

“Delegation in the presence of economic shocks therefore yields inflation outcomes closer to the preferred outcome of v 1 .”

The presence of a central bank can only change policy outcomes in the presence of multiple veto players.

“Clearly, then, the presence of a central bank can only change policy outcomes in the presence of multiple veto players.”

The model predicts that an increase in central bank independence will have a negative impact on inflation only at relatively high levels of polarization (political polarization >0.6).

“The model predicts that an increase in central bank independence will have a negative impact on inflation only at relatively high levels of polarization (political polarization >0.6).”

The policy that prevails if the two veto players revoke the central bank's independence is precisely the policy derived earlier when there is no central bank.

“Consequently, the policy that prevails should they revoke the central bank's independence is precisely the policy derived earlier when there is no central bank.”

The political polarization measure is a reasonable proxy for the degree to which the preferences of veto players diverge.

“Given the way it is constructed, the political polarization measure is a reasonable proxy for the degree to which the preferences of veto players diverge.”

Veto players occupying different veto points and from different parties do not have identical preferences with respect to economic policy.

“We do not regard this as likely, however, given that one of the principal reasons for two politicians not belonging to the same party is that they have different preferences over policy.”

The measures developed by Keefer (2002) and Henisz (1997) capture the number of veto players as well as can be done in a cross-country setting that includes both OECD and developing countries.

“The measures developed by Keefer (2002) and Henisz (1997) capture the number of veto players as well as can be done in a cross-country setting that includes both OECD and developing countries.”

• cites Keefer (2002)Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

• cites Henisz (1997)Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

Governor turnover is the best available proxy for the extent of political interference with central bank governors.

“We use this latter measure, which we call governor turnover, in our test of hypothesis 3, because it appears to be the best available proxy for the extent of political interference with central bank governors.”

Multiple veto players with divergent preferences must be present for central bank independence to have a significant impact.

“This result is consistent with the predictions of our theoretical model, as it suggests that multiple veto players with divergent preferences must be present for central bank independence to have a significant impact.”

Delegation to an independent agency enhances credible commitment.

“Delegation enhances credible commitment”

• AssumptionThe authors state this as an assumption: The central bank is more inflation-averse than either of the political actors.
• AssumptionThe authors state this as an assumption: The most inflation-averse veto player prefers the outcome under checks and balances to the most preferred outcome of the central banker.
• AssumptionThe authors state this as an assumption: The economic shock ε is distributed uniformly over the range [-c, c].

The results are robust to using a version of political constraints that excludes the judiciary as a veto player.

“All of the results we report are robust to using a version of political constraints that excludes the judiciary as a veto player.”

The move towards a less inflation-averse agenda setter had little effect on policy because other, more conservative veto players remained the same.

“The analysis here suggests that the move towards a less inflation-averse agenda setter had little effect on policy because other, more conservative veto players remained the same (e.g., the Republican president).”

Policy reformers face frustration if, in the absence of appropriate political institutions, they grant policy making authority to formally independent agencies.

“These results suggest that policy reformers face frustration if, in the absence of appropriate political institutions, they grant policy making authority to formally independent agencies.”

The results are robust to using executive constraints from the Polity IV database.

“Our results are also robust to the use of a executive constraints, a variable from the Polity IV database.”

Governor turnover is a better proxy for political influence than measures that focus on the overall rate of turnover for central bank governors.

“As argued above, while even this variable is likely to be an imperfect proxy for political influence, it is a better proxy than measures that focus on the overall rate of turnover for central bank governors.”

Political institutions are crucial to the sustainability and effectiveness of decision making by independent agencies.

“Political institutions, instead, are crucial to the sustainability and effectiveness of decision making by independent agencies.”

In 1975, at the trough of a two-year old recession, Federal Reserve policy was markedly more conservative than either the Republican President Ford or the Democratic Congress desired.

“In 1975, at the trough of a two-year old recession, Federal Reserve policy was markedly more conservative than either the Republican President Ford or the Democratic Congress desired.”

• cites Wooley (1984, 144 -47)Not matched

  Couldn’t be matched to a paper in Crossref, so it can’t be checked.

In countries where decisions over replacing the central bank governor would normally be made by a single veto player, legal guarantees of tenure can increase the number of veto players whose accord is necessary to replace the central bank governor.

“In countries where decisions over replacing the central bank governor would normally be made by a single veto player, then legal guarantees of tenure can have the effect of increasing the number of veto players whose accord is necessary to replace the central bank governor.”

The Bundesbank was able to get nearly everything it wanted in the conflict with the support of these two ministers.

“Despite this -but as the model predicts -the Bundesbank was able to get nearly everything it wanted in the conflict with the support of these two ministers.”

The impact of veto players on credible commitment depends on the certainty with which players can anticipate future status quo or default outcomes.

“the analysis shows that the impact of veto players depends on the certainty with which players can anticipate future status quo or default outcomes.”

• AssumptionThe authors state this as an assumption: The central bank is more inflation-averse than either of the political actors.
• AssumptionThe authors state this as an assumption: The most inflation-averse veto player prefers the outcome under checks and balances to the most preferred outcome of the central banker.
• AssumptionThe authors state this as an assumption: The economic shock ε is distributed uniformly over the range [-c, c].

Multiple veto players have more limited effects on credible commitment in more volatile policy environments characterized by exogenous shocks.

“Multiple veto players have more limited effects in more volatile policy environments characterized by exogenous shocks.”

• AssumptionThe authors state this as an assumption: The central bank is more inflation-averse than either of the political actors.
• AssumptionThe authors state this as an assumption: The most inflation-averse veto player prefers the outcome under checks and balances to the most preferred outcome of the central banker.
• AssumptionThe authors state this as an assumption: The economic shock ε is distributed uniformly over the range [-c, c].

The results are robust to the inclusion of political instability.

“our regression results are robust to the inclusion of instability.”

The two cabinet ministers were de facto veto players.

“First, the two cabinet ministers were de facto veto players.”

Prestige alone is insufficient to guarantee central bank independence.

“the evidence suggests that prestige alone is insufficient to guarantee independence.”

There is strong evidence that the presence of multiple polarized veto players reduces political influence on central banks.

“We therefore find strong evidence to support the conclusion that the presence of multiple polarized veto players reduces political influence on central banks”