Multiple Hands on the Wheel: Empirically Modeling Partial Delegation and Shared Policy Control in the Open and Institutionalized Economy

Abstract

The causal arguments of modern, positive political science often imply complex interactions among multiple explanatory factors. In one example from comparative and international political economy (C&IPE), sharing of monetary-policymaking control between partially autonomous central banks and politically responsive governments yields inflation as a convex combination of the rates that would have held under full-government and full-central-bank policy control. The anti-inflationary effect of central bank independence (autonomy plus conservatism: CBA) therefore depends on all political—economic variables to which central banks and governments respond differently, and, vice versa, CBA mutes the inflation effects of all such factors. Extending that logic of shared policy control to open political economies: insofar as domestic monetary authorities fix exchange rates, they effectively delegate inflation control to foreign (peg-currency) authorities, and policymakers in small and financially exposed economies must match domestic inflation to foreign (global) rates to avoid massive exchange-rate pressures. Thus, analogously, the domestic-inflation effects of fixed exchange rates and of monetary exposure depend on each other and on many other institutional and structural aspects of the domestic and foreign political economies, and, vice versa, the effects of all domestic and foreign political—economic conditions depend on degrees of exchange-rate fixity and financial openness at home and abroad. This article shows how to model such complexly interactive hypotheses empirically compactly and substantively meaningfully, and demonstrates the postwar inflation records of 21 developed democracies to favor such specifications decidedly over standard linear-additive or linear-interactive alternatives. The concluding sections discuss specific results and implications and then suggest several more potential applications of this general approach to further instances of shared policy control and other substantive contexts that induce the multiple, complex interactions characteristic of modern, positive political science in general and C&IPE especially.