اعتماد اجتماعی و استقلال بانک مرکزی

Central banks have become more independent in many countries. A common rationale has been the existence of a credibility (or lack-of-trust) problem for monetary policy. This indicates a possible and until now unexplored link between social trust and central-bank independence. Our empirical findings, based on data from 149 countries, confirm such a link, in the form of a u-shaped relationship. We suggest that two factors help explain this finding: the need for this kind of reform and the ability with which it can be implemented. At low trust, the need for central-bank independence is sufficiently strong to bring it about, in spite of a low ability to undertake reform. At high trust, the ability to undertake reform is sufficiently strong to bring high independence about, in spite of a low need for it. At intermediate trust levels, lastly, neither need nor ability is strong enough to generate very independent central banks.

Social trust – as measured by the share of people who think that most people can be trusted – seems conducive to the reaching of quite a few social and economic goals. For example, it is positively related to economic growth (Zak and Knack, 2001 and Berggren et al., 2008), GDP per capita (Dearmon and Grier, 2009), trade (Guiso et al., 2009), stock-market size (Guiso et al., 2008) and financial integration (Ekinci et al., 2009). Societies in which people think that most people can be trusted thus tend to exhibit many widely valued qualities that are lacking in low-trust societies. We propose to study whether trust affects central-bank independence. Pinpointing the determinants of this kind of independence is of interest, since previous studies have generally found it to entail low inflation rates — see, e.g., Brumm (2006), Acemoglu et al. (2008), Crowe and Meade (2008) and Klomp and de Haan (2010a). Our hypothesis is that social trust is a factor of importance — in fact, there is a connection between the rationale for making central banks more independent and trust, since the quest to give central banks an independent role largely builds on a perceived credibility (or lack-of-trust) problem. According to the literature on time-inconsistency in monetary policy, starting with Kydland and Prescott (1977) and Barro and Gordon (1983), policymakers have an incentive to renege on their pronounced inflation goals through surprise inflation, which causes the public to eventually not trust announcements of such goals.1 The equilibrium outcome is the inflation rate at which no further gains can be obtained through inflation surprises. This situation entails inefficiently high inflation with no reduction in unemployment. Rogoff's (1985) solution involves the delegation of monetary policymaking to a conservative central banker, that is, one that puts a lower weight on the loss associated with unemployment than policymakers, resulting in lower inflation in equilibrium. Despite this connection, no previous study has to our knowledge analyzed the relationship between social trust and central-bank independence. We study social and not particularized trust. The former is unrelated to information about specific persons or organizations – it captures a basic outlook on people in general – while the latter refers to trust in people or organizations that one knows or knows something about. Our primary motivation for looking at social trust is that we theorize that central-bank independence is a function of trust towards “everybody”, since a decision to delegate power arguably depends on an assessment, by those undertaking the delegating, of the reactions of very broad groups of unidentified actors, such as politicians, voters and civil servants. Only social trust, we argue, fully captures this broad, trusting outlook that is related to a willingness to undertake reform.2 To understand the relationship between trust and central-bank independence we propose two mechanisms that work in opposite directions. On the one hand, there is the ability to undertake reforms. This ability is positively related to trust: the more people trust others, the easier it is to agree on delegation of power and to overcome social conflict and strife. On the other hand, there is the need for reform. In a setting with low trust, the credibility problem of monetary policy is plausibly very high, and the need to implement central-bank independence reforms is therefore seen as more urgent. At high trust levels, this need is much smaller, since trust can be seen as an informal institution that serves as a substitute for a credible formal institution. In all, the two factors identified indicate a non-linear relationship between trust and central-bank independence. If the need is sufficiently strong at low trust levels, and if the ability is sufficiently high at high trust levels, we obtain a u-shaped relationship when putting the two mechanisms together. We investigate the relationship empirically by making use of Arnone et al.'s (2009) central-bank independence index.3 Social trust is defined as the share of the population that thinks that most people can be trusted. Previous studies of the determinants of central-bank independence do not include social trust but rather focus on factors such as interest groups and political institutions (Posen, 1993), past inflationary experience and political instability (de Haan and van't Hag, 1995), inflation aversion (Hayo, 1998), checks and balances and the design of the political system (Moser, 1999), political fragmentation, legal culture and labor-market structure (Hayo and Hefeker, 2002) and socio-political turbulence and a balance of power between the executive and the legislature (Carmignani et al., 2008). This study most closely relates to Hayo and Voigt (2008), who look at the effects of judicial independence and trust in the legal system on central-bank independence and inflation rates. They find that both factors are positively related to independence and negatively related to inflation rates. The idea is that there is a second-order commitment problem (Moser, 1999), such that politicians may have an incentive to influence monetary policy by trying to intervene in the work of the independent central bank, and that an independent and trusted legal system may make such attempts difficult to undertake. The trust measure, and the suggested mechanism for why this kind of trust matters, is different compared to the one used in this study. We also use another outcome variable: a broad central-bank independence index instead of the turnover rate of central-bank governors (although we use the latter measure in a robustness test). Our results indeed suggest a u-shaped relationship between social trust and the level of central bank independence. In general, low- and high-trusting societies both tend to delegate considerable power from politicians to independent central bankers, while countries with intermediate levels have a lower degree of independence. Thus, the institutional framework in this area seems to be affected by the level of social trust, a relationship that has not been recognized previously.

The worldwide increase in central-bank independence is one of the most important and significant trends in economic policy during the two last decades. The purpose of this paper has been to try to explain central-bank independence as a function of social trust. Interestingly, no previous study of the determinants of central-bank independence has analyzed this relationship, in spite of there being a natural link between the basis for making central banks more independent – i.e., a credibility or lack-of-trust problem – and social trust. On grounds of theory, social trust can be expected to affect the level of central-bank independence differently depending on the trust level. At high levels of trust we expect a positive effect, since the ability to implement reform is high. Trust entails lower transaction costs of political agreement about reform and makes it easier for politicians to delegate power to independent central bankers. Politicians in high-trusting societies trust not only each other but also independent central bankers. At low levels of trust, we likewise expect a positive effect, in this case because the perceived need for independence provides a strong incentive to reform the standing of the central bank. This is because the time-inconsistency problem is worse and the credibility of political decision-making weaker. Lastly, countries with an intermediate trust level have neither the sufficient perceived need nor the sufficient ability to implement far-reaching reforms, which is why we expect a lower degree of independence for that group. Our empirical results confirm this theoretical reasoning: the relationship between the variables is shown to be u-shaped. The results largely withstand several robustness checks, such as using mean and multiple imputations (in addition to original data), using different regression methods (linear and beta regressions), dealing with potential multicollinearity problems, controlling for other cultural factors and removing extreme observations. When using a different measure of central-bank independence, the turnover rate of central-bank governors, results are slightly different, but social trust remains related to this independence measure (in the case of developing countries, the u-shaped relationship was reaffirmed as statistically significant). Why is this finding important? We suggest that it contributes to a better understanding of why central-bank independence has been implemented in many countries, by introducing a new variable that has increasingly been shown to matter for economic, political, and social outcomes. As such, it can also probably have explanatory value for other types of institutional reforms. There is surely more work to be done in this area. Newer data could shed light on how the relationship studied here has fared during the financial crisis. To get a firmer grasp of how central-bank independence actually works (or does not work), future studies could investigate cases of conflict between the government and the central bank and, not least, try to discern which factors generate de facto independence. The possible causality problem could also be addressed in novel ways, possibly through case studies and studies that, through new data, are able to more clearly identify exogenous variation. Lastly, we suggest that social trust is a suitable candidate for future studies on what makes institutional change and reforms in general come about.