چرخه پولی سیاسی و رتبه بندی عملی استقلال بانک مرکزی

Political monetary cycles are less likely to occur in countries with independent central banks. Independent central banks can withstand political pressure to stimulate the economy before elections or finance election-related increases in government spending. Based on this logic and supporting evidence, we construct a de facto ranking of central bank independence derived from the extent to which monetary policy varies with the electoral cycle. The ranking avoids well-known problems with existing measures of central bank independence and provides independent information about average inflation and inflation volatility differences across countries.

There is a growing consensus on the importance of central bank independence (CBI) in ensuring low and stable inflation rates. Existing measures of CBI have been shown to predict variation in both the level and the volatility of inflation across countries (c.f. Cukierman et al., 1992 and Alesina and Summers, 1993). There are, however, well-known problems with these measures. For example, many of the rankings are based on measures of legal independence from the fiscal authorities (c.f. Arnone et al., 2007, Bade and Parkin, 1978, Cukierman et al., 1992, Eijffinger and Schaling, 1993, Grilli et al., 1991 and Jácome and Vázquez, 2005).1 These rankings may be problematic because what is written down in law can be vastly different from actual practice (c.f. Mishkin, 2004). In light of this problem, the literature has also considered de facto measures of independence. For example, Cukierman et al. (1992) and Sturm and de Haan (2001) rank independence using the average turnover rate of central bank governors. One problem with this measure, however, is that central banks that are not independent could still display little turnover if the central bank governor acts subserviently to the fiscal authority to avoid being forced to resign. Subservient governors will therefore exhibit lower turnover. 2 Measuring CBI based on actual monetary policy decisions is also problematic. Specifically, it is difficult to infer the effect that politicians have on monetary policy because many other factors, not necessarily related to CBI, determine policy. Some of these factors are observable and can be controlled for, such as the output gap; countries that grow faster relative to trend might have greater inflation concerns and therefore lower money growth rates. Other factors, however, are unobservable (or difficult to measure) and can therefore be confounded with CBI. For example, countries with dependent central banks could conceivably experience lower average inflation rates than those with independent central banks if there is a cultural aversion to inflation (Hayo and Hefeker, 2002). Measuring relative CBI based on cross-country differences in average inflation or money growth rates would therefore be problematic, even though cross-country differences in average inflation rates are partly due to differences in CBI.3 We search instead for within-country variation in monetary policy that reflects CBI and then rank CBI accordingly. We propose election cycles as a source of this variation. Before elections, politicians may place extra pressure on the central bank to expand the economy by loosening monetary policy, creating a political monetary cycle. 4 This is the first channel through which political manipulation of monetary policy might operate before or during election years, which we refer to as the Phillips curve channel. Second, political monetary cycles might be caused by political budget cycles, in which governments use expansionary fiscal policy to expand the economy and/or increase government handouts and transfers to certain constituencies. 5 These fiscal expansions can in principle be financed through borrowing. In cases where the government's borrowing capacity is limited, however, central banks may be called in to monetize instead. We refer to this as the fiscal-financing channel. 6 Both channels are less likely to exist, and therefore political monetary cycles are less likely to occur, in countries with independent central banks. Independent central banks can withstand political pressure to stimulate the economy before elections or finance election-related increases in government spending (or tax cuts). Fig. 1 plots the ratio of average money growth during election periods to non-election periods vs. central bank governor turnover for the 52 countries in our ranking.7 The graph indicates that countries with high turnover (low CBI) tend to experience larger changes in money growth during election periods. The regression results in Alpanda and Honig (2009) tell a similar story. In particular, after controlling for other factors and using existing CBI rankings, we find that the level of CBI affects the severity of political monetary cycles. Full-size image (13 K) Fig. 1. The ratio of average money growth during election periods to non-election periods. Figure options Based on this evidence, we rank CBI by the magnitude of political monetary cycles, i.e. by election-induced, within-country differences in monetary policy. One potential problem with this approach is that a central bank that always suffers from political influence and thus has high average money growth rates will be classified as independent if that political pressure does not increase during elections. While this can occur, the evidence discussed above indicates that on average countries with low CBI do experience larger changes in money growth during elections. Our ranking strategy is closest to Eijffinger et al. (1996) who construct a ranking only for OECD countries based on the coefficient of inflation in the central banks' (Taylor rule-type) reaction function. As argued before, differences in coefficients could partially be due to unobserved country-specific factors, which may confound the interpretation for differences in CBI. We instead construct our ranking based on the coefficient of the election-cycle variable. Using our ranking, we confirm previous results that countries with more independent central banks have lower average inflation rates over both election and non-election years (Cukierman et al., 1992, Alesina and Summers, 1993, Grilli et al., 1991 and Klomp and de Haan, forthcoming).8 A likely explanation for this result is that independent central banks are more immune from political pressure to finance government spending or to stimulate the economy. They can therefore build a reputation for credibility, thereby reducing the time-inconsistency problem.9 Our results thus add support to claims of the importance of CBI. Our ranking complements the existing literature on ranking CBI. However, the ranking also represents an alternative way to measure CBI based on within-country changes in monetary policy at a time when these changes are likely to reflect CBI or lack thereof. This information adds insight into the effects of CBI, and we find empirically that the ranking provides independent information about average inflation rates and inflation volatility across countries beyond that explained by existing rankings. The rest of the paper is organized as follows: Section 2 introduces the benchmark regression equation that we use to derive the election cycle-based ranking of CBI. Section 3 presents the ranking and discusses robustness checks. Section 4 explores its effect on economic outcomes. Section 5 concludes.

This paper contributes to the empirical literature exploring the role of CBI by constructing a ranking that does not rely on legal measures of independence or turnover rates of central bank governors. We argue that one of the main explanations for cross-country variation in the severity of political monetary cycles is the degree of CBI. Based on this intuition, we estimate the impact of election cycles on M1 growth in each country and use cross-country variation in the election cycle coefficients to generate a de facto ranking of CBI. Our ranking is therefore derived from the behavior of central banks during election cycles when their independence is likely to be challenged or their lack of independence is likely to be revealed. Using the ranking, we confirm that CBI is negatively correlated with average inflation over election and non-election years. Moreover, our ranking provides independent information about average inflation and inflation volatility beyond that explained by existing rankings.