financial sector influence through career paths, and leave the mechanism by which financial sector
coordination might occur to future work.
Democratic governments, on the other hand, may be unitary or not (in the case of coalition),
and do not play uninterrupted for all time. Instead, we might identify as long-run players each of
the major parties or enduring coalitions which alternate in office. For example, we might have G
L
and G
R
which alternate in office with probability p at set election times. We might also suppose
the state of the economy influences election outcomes, so that p = f (π, y). Perhaps central
bankers bargain with the party that appointed them, and expect no payment of government
jobs when that party is out of office—unless, perhaps, the central banker switches to policy
preferred by the opposition party. Hence pre-electoral uncertainty reduces the expected return
on bargains with the government (e.g., E(r) = p˜
r). As transition to a new government grows more
likely, bargains with the government must include an ever larger risk premium, lest the banker
decide to side with the incoming government (as in Alt, 1991) or the financial sector. Since
accommodating monetary policy may be key to the government’s re-election election hopes, a
larger payment seems quite likely, but whether it will be enough to prevent the central banker
from hedging his bets depends on just how (un)likely re-election is.
16
This model could be usefully extended in several ways. As the forgoing discussion suggests,
adding elections to the model may add important dynamic nuances to central bankers’ motiva-
tions. Second, one could include a richer model of the labor market, in which wage bargain-
ing coordination produces strategic interaction between wage-setters and the central bank, as in
Iversen (1999) or Franzese (1999,2001). Finally, one could add an explicit model of central banker
appointment, re-appointment, and dismissal. To do this, it would also be useful to treat the true
preferences of the central banker (χ
i
) as uncertain from the government’s view. Governments
appointing central bankers will aggregate all known information about a candidate—including
career characteristics—which may convey information on the candidate’s preferences over policy
and over career inducements. As governments update their knowledge of χ
i
, they may decide to
retain or dismiss CB
i
(at some cost), while the agent may set policy strategically to influence
this learning process. I leave these extensions for future work.
4
Testing the career effects approach to monetary policy:
Evidence from advanced industrialized democracies
The theory elaborated thus far suggests a number of testable hypothesis regarding monetary
policy making. For now, I focus on the simplest empirical implication: monetary policy should
be more anti-inflationary in the hands of financial sector types than government bureaucrats.
This argument contains several steps—between careers and preferences, between preferences and
16
Career incentives thus bear on the unanswered question of whether political-economic cycles can work through
monetary policy when central banks are legally independent. Alesina and Roubini with Cohen (1997) show post-
electoral partisan cycles in time-series cross section studies of growth, inflation, and unemployment in industrial
democracies, but despite their expectations, these cycles seem unaffected by the presence of a legally independent
central bank (i.e., interactions between CBI and Alesina and Roubini’s partisan cycle find no suppressing effect in
models of inflation or unemployment). Drazen (2000) attributes this to a misapprehension of partisan cycles as
induced by monetary rather than fiscal policy, but it is also possible that partisan cycles in monetary policy work
through career incentives, and thus circumvent legal guarantees of central bank autonomy.
19
Convention