Opportunistic, Not Optimal, Policy: A Power-Sharing Explanation for Central Bank Independence in Post-Communist Countries
(with Julia Gray and Jakob Willisch - last updated May 2018)
Conventional wisdom suggests that countries with independent central banks (CBI) have central banks ran by technocrats who are interested in policy not participating in electoral politics. But in many countries, politically experienced appointees lead central banks, including those that are highly independent. To explain why, we develop a formal model of candidate selection where the candidate has private information about his own political ambitions. One prediction from the model is that technocrats are awarded higher levels of CBI than candidates with political experience, but as the leader faces more formidable challengers, appointees with political experience get higher levels of policy discretion as well. We test our theory using an updated measure of CBI and biographical data for 29 post-communist countries between 1990 and 2012. We find evidence that the electoral strategy of the appointing political incumbent is an important predictor of a country's level of CBI.