Central Bank Independence, Democracy, and Dollarization

Journal of Applied Economics, Vol. V, No. 1, pp. 1-17, May 2002

Posted: 8 Jul 2004

See all articles by Allan Drazen

Allan Drazen

University of Maryland - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Abstract

Is there a fundamental conflict between insulating monetary policy from popular pressures, seen as essential to sound monetary policy, and making policy responsive to the popular will, seen as fundamental to democracy? We argue that strongly independent monetary policy is not inconsistent with democratic control of policymaking, once one realizes that a key feature of democratic policymaking is the decision to remove some decisions from "day-to-day" political pressures. This is the essence of "constitutionalism," central to the functioning of democracy, by which certain decisions are made difficult to reverse. It is further argued that a conflict between popular sovereignty and policymaker independence is not unique to monetary policy, but actually characterizes most policymaking in a democracy, with institutions designed to insulate policymaking from popular pressures. A constitutional perspective implies that extreme forms of commitment, such as a dollarization, are similarly consistent with democracy. One argument for such constraints on monetary policy (as opposed to fiscal policy, for example) is agreement on what good monetary policy means.

Keywords: Central bank independence, constitutional democracy, democratic control

JEL Classification: E52, E58, H62

Suggested Citation

Drazen, Allan, Central Bank Independence, Democracy, and Dollarization . Journal of Applied Economics, Vol. V, No. 1, pp. 1-17, May 2002. Available at SSRN: https://ssrn.com/abstract=562241

Allan Drazen (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742-1815
United States
301-405-3477 (Phone)
301-405-7835 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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