Goal Independent Central Banks: Why Politicians Decide to Delegate
International Monetary Fund (IMF)
Paolo Baffi Centre Research Paper No. 2008-10
A motivation for central bank independence (CBI) is that policy delegation helps politicians manage diverse coalitions. This paper develops a model of coalition formation that predicts when delegation will occur. An analysis of policy preferences survey data and CBI indicators supports the predictions. The model also explains why the expected negative relationship between CBI and inflation is not empirically robust: endogenous selection biases the estimated effect towards zero. The data confirm this.
Number of Pages in PDF File: 35
Keywords: Central bank independence, inflation, coalition formation, treatment effects
JEL Classification: C31, C72, D72, E31, E58
Date posted: March 28, 2008