Political Influence on the Central Bank: International Evidence

Abstract

Political influence on the central bank is measured here by looking at the probability that a central bank governor will be replaced shortly after a political change of government. The governor changes about half the time within six months of a nonconstitutional or other radical change of government—a military coup or a restoration of democracy. The governor is much less likely to change within six months following a routine change in the head of government—about one-fourth of the time in developing countries and one-tenth in industrial countries. These indicators vary across countries and correlate statistically with inflation and its variability and with real growth and real interest rates. Differences in the vulnerability of the central bank to political instability, in political instability itself, and in central bank turnover in nonpolitical periods seem to be a major part of the explanation for why developing countries have, on average, higher and more variable inflation than industrial countries do.