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Paper Autonomy, Private Ambition: Theory and Evidence Linking Central Bankers' Careers and the Economy
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Will it be sufficient to mark, with precision, the boundaries
of these departments in the constitution of the government,
and trust to these parchment barriers
against the encroaching spirit of power?
James Madison, Federalist 48
1
Introduction
In difficult economic times, observers wonder whether central banks will stimulate a slowingeconomy or maintain a policy to keep inflation in check. In today’s gloomy environment, manyworry that central banks will be “too conservative”, paying too much heed to inflation whileglobal recession and perhaps even deflation loom. This dilemma raises questions not only aboutinstitutions that try to balance independence and accountability, but also about the peopleworking within central banks themselves. Unfortunately, the political economy literature remainsill-positioned to address both questions because it usually conflates central bank conservatismwith central bank independence. This confusion of preferences with institutions arises from theunsupported assumption that independent central bankers are naturally conservative; in otherwords, that heavy-handed government meddling is the only source of loose monetary policy.Rather than ground a large and influential literature in an untested assumption, we shoulddisentangle our understanding of monetary preferences and institutions. We need a theory andmeasure of central bank conservatism to complement existing work on central bank independence.
To understand central bankers’ monetary policy preferences, we should begin with central
bankers’ career paths and career concerns. A central banker’s career background may influencehis personal beliefs about the ideal trade-off between inflation and output stability, while at thesame time providing the basis for exchanges of future career favors for policy influence. Hence afinancial sector veteran may make a more conservative monetary agent than a former bureaucratfor two reasons: first, because ex-bankers are conditioned to care more about inflation vis-`a-vis output; and second, because ex-bankers are more amenable to and suitable for high-levelfinancial jobs offered by financial sector firms pleased with conservative monetary policy. Inturn, bureacrats may be less enamored with inflation-fighting for its own sake, and more enticedby tacit promises of high political office to provide the government accommodating monetarypolicy. In sum, the career trajectories of central bankers before and after the central bank mayhold clues to their monetary policy conservatism while still in it.
The argument unfolds in three parts. Section 2 places this argument in the context of
recent research on central banks. Section 3 extends the standard game threoretic model ofmonetary policy (Barro and Gordon 1983, Rogoff 1986) to include career concerns, therebyallowing outside principals leverage over monetary policy even when the central bank is legallyindependent. Finally, Section 4 tests the career background hypothesis using a comprehensivenew dataset of central bankers’ career paths from twenty countries over fifty years, showing thatcentral bankers’ career experience explains significant differences in inflation performance acrosscountries and time.
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| | Authors: Adolph, Christopher. |
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Will it be sufficient to mark, with precision, the boundaries
of these departments in the constitution of the government,
and trust to these parchment barriers
against the encroaching spirit of power?
James Madison, Federalist 48
1
Introduction
In difficult economic times, observers wonder whether central banks will stimulate a slowing
economy or maintain a policy to keep inflation in check. In today’s gloomy environment, many
worry that central banks will be “too conservative”, paying too much heed to inflation while
global recession and perhaps even deflation loom. This dilemma raises questions not only about
institutions that try to balance independence and accountability, but also about the people
working within central banks themselves. Unfortunately, the political economy literature remains
ill-positioned to address both questions because it usually conflates central bank conservatism
with central bank independence. This confusion of preferences with institutions arises from the
unsupported assumption that independent central bankers are naturally conservative; in other
words, that heavy-handed government meddling is the only source of loose monetary policy.
Rather than ground a large and influential literature in an untested assumption, we should
disentangle our understanding of monetary preferences and institutions. We need a theory and
measure of central bank conservatism to complement existing work on central bank independence.
To understand central bankers’ monetary policy preferences, we should begin with central
bankers’ career paths and career concerns. A central banker’s career background may influence
his personal beliefs about the ideal trade-off between inflation and output stability, while at the
same time providing the basis for exchanges of future career favors for policy influence. Hence a
financial sector veteran may make a more conservative monetary agent than a former bureaucrat
for two reasons: first, because ex-bankers are conditioned to care more about inflation vis-`a-
vis output; and second, because ex-bankers are more amenable to and suitable for high-level
financial jobs offered by financial sector firms pleased with conservative monetary policy. In
turn, bureacrats may be less enamored with inflation-fighting for its own sake, and more enticed
by tacit promises of high political office to provide the government accommodating monetary
policy. In sum, the career trajectories of central bankers before and after the central bank may
hold clues to their monetary policy conservatism while still in it.
The argument unfolds in three parts. Section 2 places this argument in the context of
recent research on central banks. Section 3 extends the standard game threoretic model of
monetary policy (Barro and Gordon 1983, Rogoff 1986) to include career concerns, thereby
allowing outside principals leverage over monetary policy even when the central bank is legally
independent. Finally, Section 4 tests the career background hypothesis using a comprehensive
new dataset of central bankers’ career paths from twenty countries over fifty years, showing that
central bankers’ career experience explains significant differences in inflation performance across
countries and time.
2
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