Opportunistic, not Optimal Delegation: The Political Origins of Central Bank Independence

Abstract

Economists have long argued that central banks ran by technocrats have greater independence from the government. But in many countries, politically experienced central bankers are at the helm, including even highly independent central banks. To explain the level of central bank independence awarded, we develop a formal model where nominating politicians screen central bankers for their political ambitions. We show how screening and reelection efforts by the nominating politician changes the level of autonomy associated with different types of candidates. We predict that technocrats are associated with higher levels of independence than nominees with political experience, but as the appointing politician faces tougher reelection, candidates with political experience are associated with higher independence as well. We test our theory using new data from 29 post-communist countries between 1990 and 2012. We find evidence that the reelection strategy of the nominating politician is an important predictor of the level of central bank independence.