RULES OF THE GAME: CENTRAL BANK INDEPENDENCE DURING THE INTERWAR YEARS

In: International organization, Band 50, Heft 3, S. 407-443

Abstract

CENTRAL BANK INDEPENDENCE IS ASSOCIATED WITH RESTRICTIVE MONETARY CHOICES THAT CAN BE DEFLATIONARY WITHIN FIXED EXCHANGE-RATE REGIMES. BECAUSE CENTRAL BANKS ACT TO COUNTER-ACT DOMESTIC INFLATION, THEY PUT A PREMIUM ON DOMESTIC PRICE STABILITY AT THE EXPENSE OF INTERNATIONAL MONETARY STABILITY. EVIDENCE FROM FIFTEEN COUNTRIES BETWEEN 1925 AND 1938 SHOWS THAT THE MORE INDEPENDENT CENTRAL BANKS TOOK MORE DEFLATIONARY POLICIES THAN WERE NECESSARY FOR EXTERNAL ADJUSTMENT. CENTRAL BANKS IN GENERAL WERE MORE RESTRICTIVE UNDER LEFT-WING GOVERNMENTS THAN THEY WERE UNDER MORE CONSERVATIVE REGIMES AND OFTE WERE MORE RESTRICTIVE THAN REQUIRED FOR EXTERNAL EQUILIBRATION. THIS SUGGESTS THAT POLICIES OF INDEPENDENT CENTRAL BANKS DESIGNED TO ENHANCE DOMESTIC PRICE STABILITY MAY FORCE DEFLATIONARY PRESSURES ONTO OTHER STATES IN THE SYSTEM AND POTENTIALLY DESTABILIZE A FIXED EXCHANGE-RATE REGIME.