Rational Fictions Central Bank Independence and The Social Logic of Delegation

West European Politics
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Rational Fictions: Central Bank Independence and

the Social Logic of Delegation
Kathleen McNamara
To cite this article: Kathleen McNamara (2002) Rational Fictions: Central Bank Independence and
the Social Logic of Delegation, West European Politics, 25:1, 47-76, DOI: 10.1080/713601585
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Rational Fictions:
Central Bank Independence and the
Social Logic of Delegation
K AT H L E E N R . Mc NAMARA
The insulation of central banks from the direct influence of elected officials
has been one of the pre-eminent examples of the practice of delegation to
non-majoritarian institutions. More countries increased the independence of
their central banks during the 1990s than in any other decade since World
War II.1 This wave of institutional delegation showed little regard for region,
sweeping across countries as diverse as Albania, Sweden, Kazakhstan, and
New Zealand. Central bank independence has been promoted by
international organisations such as the OECD and the IMF as a benchmark
of good governance. It was also used by European Union (EU) leaders as an
obligatory criteria for entry into Economic and Monetary Union (EMU).
The EU’s new European Central Bank (ECB), established in 1999, takes
central bank independence to the extreme, with only weak channels of
political representation and oversight.
Central bank independence has achieved an almost taken for granted
quality in contemporary political life, with little questioning of its logic or
effectiveness. Indeed, the theoretical rationale behind the delegation of
political authority to independent central banks is straightforward and
appears ironclad in its logic: the preference of politicians chasing votes in
the next election will be to manipulate the economy in ways that make the
populace happy in the short term, disregarding the potential for their
monetary policies to produce economic trouble in the long run. Thus, it
seems reasonable to assume that central bank independence is a necessary
solution to a functional economic policy problem, and that it is this
efficiency logic that has produced the dramatic move towards increased
independence over a wide swath of nations.
This article will challenge this conventional wisdom. On the theoretical
level, it will argue that advocates of central bank independence rely on a
series of contestable arguments about the relationship between democracy,
policy making, and economic outcomes. First, although advocates of central
bank independence argue for the need to insulate monetary policy from
politics, severing ties to democratic representatives and relying on
West European Politics, Vol.25, No.1 (January 2002), pp.47–76
PUBLISHED BY FRANK CASS, LONDON
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48 WE S T E U R O P E A N P O L I T I C S
technocratic expertise does not apoliticise monetary policy. Rather,

delegation to independent central banks produces partisanal policies, with
significant distributional effects that raise important questions of
democratic accountability. Second, the government–central bank
relationship does not necessarily capture the most significant influences on
economic outcomes, such as the role of societal groups in shaping
macroeconomic conditions. In regard to the empirical evidence, the article
puts forward findings on delegation to independent central banks that cast
doubt on the severity and nature of the problem purportedly solved by
delegation, that is, the pernicious inflationary effects of democracy on
policy making, as well as raising questions about the linkages between
delegation and superior economic outcomes.
If the conventional wisdom is misleading, why then have we seen the
spectacular spread of central bank independence? Remarkably, delegation
in this realm has been applied as a ‘one size fits all’ solution across nations
even when the economic problems it is designed to address are absent. My
argument is therefore that governments choose to delegate not because of
narrow functional benefits but rather because delegation has important
legitimising and symbolic properties which render it attractive in times of
uncertainty or economic distress. The spread of central bank independence
should be seen as a fundamentally social and political phenomenon, rooted
in the logic of organisational mimicry and global norms of neoliberal
governance. Organisational models are diffused across borders through the
perceptions and actions of people seeking to replicate others’ success and
legitimise their own efforts at reform by borrowing rules from other
settings, even if these rules are materially inappropriate to their local needs.
This dynamic is rational and instrumental, as suggested by theories of
delegation within the principal–agent framework, but only when placed
within a very specific cultural and historical context that legitimises
delegation – the culture of neoliberalism. Moving to an independent central
bank appears to shelter monetary policy from the evils of democracy and
partisanship while in fact solidifying a specific set of ideologies and partisan
positions which favour certain groups in society over others. The
conventional justifications for delegation obscure these dynamics in ways
that make central bank independence more acceptable to all.
The article proceeds as follows. First, it investigates the theoretical
literature on the topic of central bank independence, spelling out the logical
arguments which form the basis for the recommendation that monetary
policy be delegated to a non-majoritarian institution. It offers some critiques
of the theoretical arguments that central bank independence is the most
effective form of economic governance and outlines the weak empirical
evidence for the merits of delegation. It then provides an overview of some
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RATIONAL FI CTI ONS 49

of the arguments and evidence on why countries have chosen central bank
independence. It contrasts the conventional wisdom, which suggests that
central bank independence is adopted due to pressing functional necessity,
against a literature on the sociology of organisations that suggests that
central bank independence is determined by a social process of cross-
national institutional diffusion. Finally, the article concludes by examining
the broader political implications of the argument. It suggests that while
central bank independence may be a highly legitimate organisational form
in terms of the contemporary ideology of neoliberalism, it can have
troubling implications for democratic legitimacy and accountability. This is
particularly true in the case of the European Central Bank, and the tensions
that flow from this legitimation problem remain unresolved.
THE THEORY OF CENTRAL BANK I NDE P E N D E N C E
Central bank independence is one of the most prominent examples of the

delegation of policy making to non-majoritarian institutions. The trend
towards independence is demonstrated in Figure 1, which depicts the
F I GURE 1
CE NT RAL BANK I NDE P E NDEN CE O V ER TIME
Number of Legally Independent Central Banks
40
35
30
25
20 CB
15
10
0
1950 1960 1970 1980 1989 1990 1991 ''
1992 1993 1994 1995 1996 1997 1998 1999 2000
Year
Sources: Pre-1990s data on legal central independence by decade comes from A. Cukierman,
Central Bank Strategy, Credibility, and Independence: Theory and Evidence
(Cambridge: MIT Press 1992). Data on legal CBI in the 1990s comes from S. Maxfield,
Gatekeepers of Growth: The International Political Economy of Central Banking in
Developing Countries, Table 4.1. Post-1994 CBI data comes from the European
Monetary Institute, Convergence Reports 1998 and 1999, and from press reports of
national central bank legislation in non-EU countries. A central bank is independent if
it recieves a score of .35 or higher from Cukierman et al. for the period 1950–89. After
1989, central banks are assumed to remain independent once they reach the threshold
identified by Maxfield. Post-1994 central banks are coded by author using the
Cukierman standard.
251wep03.qxd 18/12/2001 11:37 Page 50
variation over time in the number of central banks that can be classified as
legally independent.
Yet, perhaps because monetary policy is such a seemingly technical and
arcane research area, much of the broader political science discussion of
principal–agent issues occurs separately from the discussion in economics
about central bank independence, with some important exceptions.2 This first
section of the article thus attempts to situate the logic of central bank
independence within the principal–agent literature and lays out, as simply as
possible, the conventional wisdom regarding the logic of delegation in this
issue area. After summarising the arguments for central bank independence,
the article offers some conceptual critiques of this logic before examining the
empirical evidence regarding the costs and benefits of central bank
independence.
The basic premise of principal–agent (P–A) theory is that in certain
instances, one actor (the principal) may gain from delegating power to another
actor (the agent) if there is an expectation, first, that the agent’s subsequent
actions will be aligned with the principal’s preferences and, second, that
moreover there is some advantage to moving policy capacity to the agent.3
Although developed in the context of American congressional politics, P–A
analysis offers a ready-made framework that directs our attention to
similarities across a wide range of activities of delegation. It has the potential
to highlight nuances in the interplay between key actors, for example, the role
of EU member states as principals and the role of central banks as agents. In
the case of EU institutions, in particular, P–A offers a more dynamic and
potentially more productive understanding of the mutual dependence of
agents and principals than is possible using intergovernmental or functionalist
approaches.4 The focus of this article, however, is the decision to delegate,
examining the rationale for the act of moving control for day to day
governance activities out of the hands of those who at first glance should be
most desirous of keeping it. As outlined in the Thatcher and Stone Sweet
introduction to this volume, the P–A analysis identifies common reasons why
principals choose to delegate, one of which, the resolution of commitment
problems, is widely given as the reason for central bank independence.
Thatcher and Stone Sweet note that commitment problems have a distinct
logic in the delegation game. The assumption underlying delegation in these
areas, as we shall see, is that it will allow principals to overcome the obstacles
lying in the way of more optimal policies. Drawing on P–A analysis, Thatcher
and Stone Sweet note that commitment problems also tend to produce
delegation with minimal ex post control over agents, as the institution in
question needs to appear as delinked as possible from the principal if it is to
appear credible. The spread of central bank independence certainly matches
this general logic and its predictions about the form of delegation.
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However, P–A analysis cannot fill in the theoretical content for
understanding specific sets of causal dynamics which cause commitment
problems and enable their resolution through institutional design. For this,
we need to turn to more specific, substantive theories. In the case of central
bank independence, such theories are drawn mostly from work in political
economy on the interaction between political influences and economic
outcomes. These theories nestle inside the broader P–A framework,
although not without certain important tensions, as we shall see.
In the area of central banking, the justification for delegation is its ability
to solve the problem of inflation purportedly caused by political involvement
in monetary policy making. Central banks are generally charged with
controlling the flow and supply of money, most importantly through the
setting of interest rates, but also through such things as bank reserve
requirements. There are at least three major macroeconomic indicators
important to the health of the economy: GDP growth rates, unemployment
levels, and inflation. It is a concern about inflation, however, that has
dominated the debate over the merits of delegating policy making to
independent banks. Theorists have hypothesised about two different ways for
politics to impact negatively on the functioning of central banks and cause
inflation: through electoral effects and through partisan dynamics. The
working of the democratic process, in this portrayal, may have pernicious
effects on monetary stability, and far sighted politicians and their publics
should seek the removal of central banking from the direct influence of
elected officials as the appropriate cure. The two logics are analysed in turn.
First, electoral politics are hypothesised to provide an overwhelming
incentive for politicians to try to buy votes by stimulating the economy in
advance of an election, most notably by lowering interest rates and easing
the money supply in advance of election day.5 The result is a ‘political
business cycle’, where the economy grows and contracts in tandem with the
election schedule. This pattern is viewed as being problematic, because,
while it may deliver votes, it can provide only short term benefits to the
public while causing inflation in the long run. It may also be destabilising
to the economy as a whole, producing cycles of boom and busts, or high
growth and recession.6
A second problem with political control for some theorists of central
banking lies in the effect of partisan politics, that is, the tendency for
political parties to attempt to distinguish themselves in the eyes of the voters
by advocating different economic policies. The partisan problem does not
lie per se in partisanship itself, but from a specific type of partisanship, that
is, the historical political choice of parties on the left, be they the
Democratic Party in the United States, the Socialists in France, or the Social
Democrats in Germany, to pursue more expansionary policies than the
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parties of the right. These leftist parties have traditionally targeted their
appeal to workers, not investors, and therefore may give more priority to
growth and unemployment than to price stability.7 Logically, therefore,
these parties on the left may be more likely to pursue expansionary policies
that, again, may be desirable in the short run but in the long run may
produce unacceptably high levels of persistent inflation. Inoculating central
banks from these partisan and electoral effects by placing monetary policy
in a technocratic realm, separate from politics, is the policy prescription for
the hypothesised shortcomings of democracy.
These electoral and partisanal challenges, supported by deductive
arguments from the rational expectations approach, mean the only way out
of this conundrum is for the central bank to be able to commit credibly to
keeping inflation low.8 Delegation to non-representative institutions is seen
as the key way to enhance commitment.9 By removing the bank from
democratic pressures and establishing that it is free from political influence,
the central bank may be able to convince actors in the economy that it has
no incentive to manipulate the money supply for political gain. The most
positive scenario, in this line of reasoning, is that once credibility is
established the independent central bank can undertake surprise reflations
of the economy, sparingly and at unpredictable times, ultimately producing
more effective monetary expansions without inflationary side effects.
Assuming for the moment that policy makers have a long run view of
their self-interest such that the solution of delegation will be attractive, the
functional logic of central bank independence sets up the next important
question: how should policy makers go about establishing a credible
delegation of policy authority to the central bank? The achievement of
central bank independence is generally viewed as dependent on at least
three factors: a low degree of political involvement in personnel matters
within the bank; the financial separation between the central bank and the
government; and the policy independence of the central bank from political
directives from the government.10 Independence in personnel matters is
usually assumed to be highest when there are long, non-renewable terms of
office, arms-length appointment procedures, and very high barriers to
dismissal of central bank authorities. Financial independence is important to
the overall degree of independence as governments that rely on their central
banks for credit or management of the government debt are by definition
much more intertwined in central bank policies. Finally, the setting of
monetary policy itself is subject to degrees of independence, and theorists
have often separated out goal independence from instrument independence.
If the central bank is free to set the final objectives of monetary policy, be
it zero inflation or smoothing output, the government has delegated policy
goals. The government may also give the central bank discretion over how
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it achieves those goals, that is, the instruments used such as inflation
targeting or monetary targeting. These two are not always found together,
for example, the European Central Bank is directed to pursue the goal of
price stability, although it is not further defined numerically, while there is
no effort to specify the instruments the ECB should use to further that goal.
Obviously, independence is a continuum, and legal independence is not a
perfect guide to independence in practice. Some banks, such as the pre-
EMU Dutch central bank, may be behaviourally independent and treated as
such by society and government, although their statutes do not ascribe them
as much legal independence as other banks.
Despite disagreement over the exact practical contours of independence,
the arguments regarding the delegation of monetary policy are compelling.
Monetary policy is an uncertain realm that can have great impact on the
macroeconomy, for ill or good. Delegation seems to provide a one size fits
all solution to the politicisation of monetary affairs. However, the
theoretical rationales rest on shakier foundations that might be apparent at
first glance. Below, two critiques of the essential premises of central bank
independence are put forward. The first critique confronts the question of
whether severing ties to democratic representatives and shifting to
technocratic expertise within an insulated institution does truly apoliticise
monetary policy making; the second point asks whether focusing solely on
the government–central bank relationship captures the most significant
influences on monetary policy outcomes. Both questions are answered in
the negative, challenging the functional logic of delegation.
THE POLITI CS OF CENTRAL BANK I ND E P E N D E N C E
My first critical argument concerns the basic premise underlying the logic
of central bank independence: delegation is warranted because of the need
for economic expertise to provide more optimal, politically neutral policy
solutions, policies that are not readily accomplished in the context of
political intervention.11 Delegation to central banks is attractive in part
because it seems to place priority on improving aggregate welfare, on
making the economy work better for the majority of people by taking
monetary policy away from the vicissitudes of electoral and partisanal
politics. This logic is illusory, however. While severing the direct
institutional ties to elected officials appears to create an apolitical
environment for policy making, central banks continue to make policies
which have important, identifiable distributional effects and thus remain
resolutely political and therefore partisanal institutions.
As Joe Stiglitz has written, ‘the decisions made by central bankers are
not just technical decisions: they involve trade-offs, judgments about
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whether the risks of inflation are worth the benefits of lower unemployment.
These trade-offs involve values’.12 The values at the core of delegation to
independent central banks are neoliberal in nature, as the purported effects
of the electoral and partisanal influences on central banking all ultimately
centre on the risk of inflation and its potential for detrimental long term
effects on the economy.13 Thus, although principal–agent analysis focuses
on delegation as a procedural solution, delegation in the area of central
banking is a substantive choice as well. The privileging of price stability
over growth and employment has important consequences. Those with
money to save and invest may benefit from a low and stable rate of inflation,
although if it falls so low as to choke off growth entirely, their investments
will suffer as well. Those who rely on wages will tend to be helped more by
a growing economy which maintains high levels of employment. Very high
levels of inflation will dampen the investment and economic activity that
workers rely on as well as eroding the capital of the wealthier groups. There
is also an intergenerational component to the distributional effects of
inflation. Older, retired workers will be more affected by inflation as they
rely on investments and savings, whereas their children and grandchildren
may be more affected by slowdowns in the economy. These distributional
consequences of central bank independence have been subject to relatively
little analysis in the literature or in the popular discourse, as the logic of
central bank independence projects a procedural and political neutrality to
the process of delegation that mutes questions about the values being traded
off in pursuit of price stability.14
Given these distributional impacts, delegation raises important
democratic accountability questions. In the general principal–agent
literature, one of the potential benefits of delegation is to move policies
closer to the desires of the median voter, desires that for some reason are
difficult to achieve without such delegation. Thus, it can be argued that
delegation is actually more democratic than allowing politicians to hold
sway over policy for their own ends, subverting the common good.
However, the argument in favour of central bank independence has evolved
differently, positing in effect that the desires of the median voter should not
guide policy. In fact, one influential article argues that the ideal central bank
appointee will be more conservative and anti-inflationary than the median
voter, as the latter might favour more growth without factoring the
potentially negative longer run consequences of expansionary policies.15
Indeed, the structure of central bank independence does not make it likely
that the median voter’s preferences are captured. The majority of
individuals appointed to central bank boards, even when the ruling party is
on the left, are from the private banking or investment communities, with a
very small representation from industry and virtually no representation from
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other sectoral groups such as labour. This makes it less likely that a diverse
spectrum of views will be represented. The limited role for political
representatives in government positions in the formulation and execution of
monetary policy may make it difficult to rein in central bankers that deviate
too far from social norms regarding the management of the economy.16
However, the argument for central bank independence made by many
economists and policy makers pays little attention to this danger of too
much autonomy on the part of the agent, because of the underlying
assumption that the principal (the national government) does not necessarily
know its own interests. This is in contrast to much of the principal–agent
literature, which has tended to stress the potential for difficulties on the
agent side, arising from too much delegation or control shifting away from
the principals.17 Two types of procedural problems are identified as
potentially arising from delegation: agency ‘shirking’ and agency
‘slippage’. Shirking and slippage imply some sort of non-compliance by the
agent such that the agent is no longer following the goals of the principal.18
The purposefully low level of direct political oversight in the area of central
banking means that it is likely that independent central banks will have an
intentionally high degree of agency slack. This is a positive development if
you are confident in the merits of governance by highly conservative central
bankers who exceed the preferences of elected officials for low inflation.
However, such delegation may produce monetary authorities who pursue
the goal of low inflation with too much zeal and thus have the potential to
stave off needed growth and employment in the economy, without much
leeway for the principals (that is, the governments) to correct this policy
drift.
Finally, a further and related conceptual critique of the principal–agent
framework of central bank design is that it may overly emphasise the
importance of a narrow set of dynamics between the government and the
central bank at the expense of the broader societal dynamics that play a key
role in economic policy outcomes. A strong argument can be made that
central bank independence is a behavioural, not legal or organisational,
phenomenon, and that it is more a function of societal relations, shared
expectations and other such variables, rather than rules and institutional
designs.19 Delegation does not occur in a political vacuum, and to what
degree the effectiveness of the institutional form is actually endogenous to
prior political relationships is a key question not adequately addressed in
much of the debate. Persuasive logical arguments can be made in support of
explicit and transparent linkages to electoral institutions, be it as official
oversight or informal interactions, in order for the central bank to have the
political support and policy co-ordination needed to achieve positive policy
outcomes. In the case of Germany, for example, a complex set of societal
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understandings and relationships underpins the Bundesbank’s success in

achieving growth and stability.20 This broader context of interlocutors in the
policy process is outside the logic of delegation to independent central
banks.
DELEGATI ON AND OUTCOM ES I N PRAC T I C E
Conceptual critiques are all very well, but what about the empirical case for
central bank independence? Can it be demonstrated to have been successful
in ameliorating inflation or improving economic conditions across the
various national settings? The rational choice institutionalist logic of
delegation is based on the idea that policy makers choose these institutional
designs in the expectation that they will address a compelling problem and
produce better outcomes – a more optimal level of inflation in conjunction
with employment and growth. Political influence, in the logic of central
bank independence, can be dysfunctional for the economy, and the positive
outcomes achieved from delegation therefore can be argued to outweigh
concerns about the loss of democratic accountability.
To evaluate the necessity and efficacy of delegation in the management
of money, three questions of the empirical research on central banking are
asked. Can it be demonstrated (1) that there has indeed been a problem with
democracy that central bank independence must solve, that is, a pattern of
political business cycle behaviour or partisanal bias producing inflationary
outcomes; (2) that inflation itself can be empirically demonstrated to be
highly detrimental such that it presents a compelling rationale for central
bank independence; or (3) that central bank independence does indeed
produce more positive economic outcomes, outcomes that better match the
long term interests of policy makers and citizens than those achieved with
politically dependent central banks? Empirical evidence on these points
would certainly provide support for the functional argument regarding
central bank independence.
On the first issue of whether electoral or partisanal influences on
monetary policy are a critical factor producing high levels of inflation, the
empirical evidence is mixed at best. A recent survey of the political business
cycle literature and the effects of electoral politics on central banks assessed
25 years-worth of studies and found that the literature’s evidence is thin, and
the ‘principal conclusion is that models based on manipulating the economy
via monetary policy [for political gain] are unconvincing both theoretically
and empirically’. The author goes on to argue that ‘explanations based on
fiscal policy conform much better to the data and form a stronger basis for
convincing theoretical model of electoral effects on economic outcomes’
than do monetary policy manipulations.21 Governments may try to influence
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the outcomes of elections by using the economic levers at hand, but those
tools tend to be traditional pork barrel politics, that is, spending projects that
may stimulate the economy, rather than manipulations of the money supply.
Neither have analysts found convincing evidence of systematic
partisanal differences in monetary policy since the 1970s. While work done
on cross-national experiences in the early post-war era demonstrated
evidence for partisanal effects, these effects have declined over the past few
decades, in advance of the widespread delegation of central banks.22 The last
few decades of experience have produced strikingly convergent monetary
policies in the EU, for example, oriented towards low inflation policies
regardless of what party is in power, whether it was the leftist Socialists in
Spain or the Christian Democratic right in Germany. This convergence
preceded the move to central bank independence, suggesting that other
factors beyond the organisational delegation of monetary policy are at work
in producing price stability, despite democratic influences.
The second key question concerns the empirical evidence on the
negative effects of inflation itself. The literature on delegation to central
banks takes as given the fact that inflation is extremely detrimental and must
be avoided at all costs. Nonetheless, Stiglitz is one prominent economist
who has questioned this assumption, and he offers persuasive empirical
evidence for his position.23 He points out that an older literature evaluates
the costs of inflation in terms of such things as ‘menu costs’, ‘shoe leather
costs’, tax distortions and increasing noise in the price system; however, the
empirical estimates of the deadweight losses from these factors are
relatively small. A newer literature has looked at how inflation might affect
the level of output and growth. Studies by Bruno and Easterly have found
that inflation rates need to be quite high, in excess of 40 per cent per year,
to be very costly, and that below that level there is little evidence of a high
inflation/low growth trap.24 In addition, studies have done cross-country
comparisons of the effects of inflation on growth.25 Echoing the earlier
findings, they find that while very high levels of inflation are detrimental to
growth, lower levels do not seem to have the same impact.
Stiglitz goes on to present his own evidence regarding two other
common assumptions about why inflation should be kept extremely low:
that inflation will accelerate uncontrollably if left unchecked, and that it is
costly to reverse.26 In fact, Stiglitz finds no statistical evidence that inflation
builds on itself but rather that when it has been rising it is likely to reverse
its course. He also finds that adjustment occurs in the economy in more
effective ways than is assumed by inflation hawks. He notes that we still
have an imperfect understanding of the way the economy works, and that
this should make us very cautious about prioritising inflation fighting above
all things. Inflation is not clearly detrimental to the economy, and pre-
251wep03.qxd 18/12/2001 11:37 Page 58
emptive contractionary policies that attempt to dampen inflation while

subsequently slowing growth and employment are policies ‘based on
articles of faith, not on scientific evidence’.27
The third and final empirical question to be addressed is the question of
whether central bank independence does in fact produce better economic
outcomes overall. In contrast to other areas of policy delegation, which
rarely offer systematic evidence about the effects of delegation, there is a
large literature in economics which attempts to determine the relationship
between central bank independence and macroeconomic outcomes.28
Despite careful efforts on the part of scholars, however, the evidence for
superior economic outcomes from central bank independence remains
inconclusive.
The essential problem is that the strength of the correlation found
between central bank autonomy and outcomes such as lower inflation is
extremely sensitive to the (highly contested) criteria used to measure
independence, the time period chosen, and especially the countries included
in the sample.29 This latter point is important because if one looks at
developing countries as opposed to advanced industrial ones, the positive
impact of central bank independence on inflation simply disappears. This
should hardly be surprising, because politics in developing countries is
often guided by informal rules rather than laws and formal procedures and
because such countries lack the range and depth of institutions necessary for
full policy implementation and co-ordination.
Even in advanced industrial countries, where the correlation between
central bank independence and lower inflation seems strongest, the case is
not clear-cut. Adam Posen claims that ‘differences in central bank
autonomy and reputation are not the sources of inflation differences among
the advanced industrial countries … all the published arguments used to
trace a causal link between [central bank independence and low inflation]
are not borne out by economic reality’.30 What really matters in the long
term struggle against inflation, Posen finds, is a strong financial sector
interested in price stability and willing and able to influence policy making
to get it. Central bank independence and lower inflation, in this view, are
linked not because one causes the other but rather because both are caused
by the political effectiveness of a particular interest group coalition.31
Other scholars have come up with similar findings, noting that
independent central banks will have little positive long-term impact on
inflation unless there is a societal consensus on the need for price stability.
Students of Germany, for example, have argued that the real source of the
Bundesbank’s effectiveness is not its statutory independence but rather a
widespread public acceptance of the need to make inflation fighting a
primary goal of economic policy and the Bundesbank’s ability to act in
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concert with the ‘social partners’, that is, labour and business, in keeping
down wage and price increases.32
In sum, the empirical work on delegation to independent central banks
casts doubt on the severity and nature of the problem purportedly solved by
delegation, that is, the pernicious effects of democracy on policy making,
particularly with regard to inflation, as well as raising questions about the
linkages between delegation and superior economic outcomes. This raises a
basic question. If the premise of delegation is that policy makers choose
these institutional forms, such as central bank independence, because they
anticipate superior economic outcomes in their country with delegation,
why might they continue to do so even if such evidence is not forthcoming?
The section below suggests an alternative explanation for the diffusion of
central bank independence.
W H Y D E L E G AT E ? T H E S O C I A L B A S I S O F D I F F U S I O N O F
O R G A N I S AT I O N A L F O R M S
If central bank independence rests on shakier functionalist foundations than

is usually assumed, why has there been such a widespread move towards
this organisational form? In this section, an alternative sociological
perspective for the logic of delegation is outlined.33 In this approach, the
choice of organisational form is linked to social processes that legitimate
certain types of institutional choices as superior to others. Governments
choose to delegate monetary policy to independent central banks because it
is instrumentally rational given a particular cultural environment, one that
rewards this organisational form. In this sociological perspective, it is the
symbolic properties of central bank independence that carry substantial
weight in explaining policy diffusion, rather than the expressed functional
properties of delegation.
A comprehensive set of sociological institutionalist arguments about the
sources and working of organisational design have been put forth by Scott
and Meyer and can be applied to the diffusion of central bank
independence.34 This approach departs from the conventional wisdom of
delegation in at least three ways: in the definition of what organisations are
and where their rules come from; in what mechanisms drive the adoption of
specific organisational forms; and in the nature of rationality in
organisational design.
First, the rule and practices of organisations arise, in this sociological
account, from cultural and social processes, rather than being derived from
local functional needs. Organisations, meaning visible structures and
routines, are direct reflections and effects of wider cultural and symbolic
patterns or templates. The definition of organisation is thus very ‘thick’, as
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organisations both embody and shape broader social and cultural dynamics.
Therefore, central banks (as organisations) must be analysed in terms of the
broader social environment within which they are situated – the ideas,
norms, and culture of the moment – as it is this environment that profoundly
shapes their form and practices. By situating central bank independence
within a national or transnational culture of neoliberal economic policy
making, which privileges price stability as an absolute good, it is easy to see
why central bank independence, with its substantive bias towards low
inflation outcomes, is a rational strategy. Further, in an increasingly
globalised international financial market, central bank independence is one
way of signalling to investors a government is truly ‘modern’, ready to carry
out extensive reforms to provide a setting conducive to business.35 Note,
however, that this signal is understood as such even if the statistical
relationship between this organisational form and superior economic
outcomes may not be borne out in practice. Delegation to central banks is
thus a very rational adaptation to a specific cultural environment which
rewards certain organisational forms over others, in part because of the real
distributional effects that such delegation may provoke.
In this process of organisational diffusion, Scott and Meyer point out
that specific local functional needs may not be the central source of an
organisational structure, but rather designs are borrowed from other
environments and then applied locally despite important differences across
settings.36 For example, it may not be the specific circumstances of the
national economy that produces delegation to independent central banks,
but rather the template of the central bank may be suggested by other
national experiences that are perceived as successful. Thus, a country in the
depths of a recession may increase central bank independence even though
slow growth, not inflation, is the key policy challenge – policy makers use
central bank independence to signal to investors that they are credibly
following a reformist path. The transfer of the template occurs therefore
even though there may be important discrepancies in the needs and contours
of the national political economies that make the replication of that success
unsure or unlikely.37 For example, a country such as Ecuador, without the
legal and political institutions to truly emulate independent central banks
such as the ECB, may rationally pursue this organisational design for its
symbolic properties although central bank independence ends up being
meaningless in practice.
Second, in the sociological institutional perspective, the causal
mechanisms driving the adoption of an organisational form, such as central
bank independence, work through constitutive or phenomenological aspects
and are socially constructed in conjunction with material circumstances. For
example, markets themselves do not speak: the ‘signals’ that they send
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about standards of appropriateness occur through the evaluations and
judgements of specific social actors operating within a dense cultural
environment that shapes their interpretation of market signals. Credibility,
the keystone of the central bank independence framework, is a perceptual
variable, and thus constituted by social processes. The sociological
perspective contextualises this process so as to illuminate the interplay
between particular functional or material pressures, the subsequent
interpretation of these pressures by actors, and the consequent creation of
shared perceptions about those pressures and how to solve them. The view
that central bank independence is a necessary component of good
governance did not magically fall from the heavens, but rather was created.
This process of social construction, for these theorists, permeates the
creation and diffusion of organisational forms.
Applied to central bank independence, the development of rules
regarding the appropriate mode of central bank design can be seen to be an
inherently social process occurring between human agents in interaction
with each other and their material environments. Political elites face a host
of challenges in governing their economies, and the social environment that
they move within may provide central bank independence as a solution,
even if not actually tailored to their specific circumstances. The sources of
social interactions and linkages between actors in the central banking field
are numerous, found in the international and regional monetary policy fora
which link national central bankers and economic policy leaders, such as the
Group of 7, the International Monetary Fund, the Organisation for
Economic Cooperation and Development, and the Bank for International
Settlements. The development of epistemic communities and expert
consensus on the part of these officials is well documented, and is likely to
have contributed to the diffusion of central bank independence.38 The shared
education of these officials within elite economics departments, centred in
American universities like MIT or the University of Chicago, is also a
foundational aspect of the process of socialisation and acculturation that
produces conformity in outlook and beliefs about the workings of the
economy.39 The creation of meaning can also occur in more diffuse ways,
such as in the development of a conventional wisdom in tandem with
reporting and editorialising by financial media such as the Financial Times,
which has asserted that ‘The argument[s] for central bank independence
appear overwhelming’, or the Economist, which has declared that ‘The
intellectual case for independent central banks [has been] more or less
won’.40
The third contention of this sociological perspective is that the processes
and patterns that create and change organisations are both rationalised and
rationalising. Modern sociocultural environments tend towards a process of
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rationalisation, that is, ‘the creation of cultural schemes defining means–

ends relationships and standardising systems of control over activities and
actors’.41 The spread of a standardised form of political organisation, such
as the delegated governance model, is a direct result of these social
processes. Actors must first perceive similarities across different national
settings for the diffusion of a particular organisational form to make sense;
abstraction into common categories, such as ‘the market’ or ‘the state’ is
necessary for the use of templates to be rational. Cognitive or conceptual
theorising about the appropriate functions of central banks, for example,
and the development of a body of research that provides a recipe for
success, regardless of setting, is in part the product of a modern, rationalised
world culture. Part of that rationalised culture is rooted in the highly
developed theorising of the academic discipline of economics. We take for
granted the appropriateness and necessity of the sort of comparison and
rationalisation implicit in the discussion of central bank independence;
however, a case can be made that it is equally sensible to assume that
differences across national institutional, political, and economic settings
will make the transfer of templates without alteration ineffective, or
possibly detrimental, to those local economies.42
Given these three sets of processes, sociologists argue that institutional
isomorphism, or the similarity of organisational form across settings of
social interaction, will be the expected outcome, as actors borrow those
models collectively sanctioned as successful even though they may be
decoupled from or incongruent with functional needs. Such organisational
isomorphism has received a great deal of study among sociological
institutionalists and economic sociologists.43 For these theorists, the
replication and diffusion of organisational forms is provoked in part by the
need to find legitimacy in terms of the prevailing norms, rather than
adaptation to straightforward functional problems. The contrast with the
prevailing wisdom of delegation to independent central banks as an
instrumentally rational decision, the perspective outlined in the first section
of this article, is striking.
PROBING THE SOURCES OF CENTRAL B A N K I N D E P E N D E N C E
This article has so far articulated two quite different sets of arguments about
why delegation in the monetary realm might be a sensible choice. Although
the arguments make very different claims about the process by which
delegation occurs, they both predict similar outcomes of institutional
isomorphism, that is, the rise in central bank independence over time
demonstrated earlier in Figure 1. How can we therefore adjudicate
empirically between these explanations? Below, a series of hypotheses is
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offered for what we should observe given the two logics, material and
social, that drive the respective theories. Although a complete test of these
two approaches is not possible here, the purpose is to provide some
suggestive illustrations of the limits and potential of each explanation.
First, the purely functional approach implies that countries increase the
independence of the central banks because they believe delegation will
solve their economic problems, particularly high inflation. Although the
present article challenges the logic of this solution and the evidence that
independence produces superior outcomes, it may be that governments are
responding to a set of material circumstances for which central bank
independence is viewed as offering a rational solution, even if the actual
correctness of this analysis is flawed. Thus, empirically we should examine
whether or not the material economic circumstances in advance of the
decision to delegate do indeed match the conditions that independence is
meant to improve on. Most prominently, inflation rates should be
persistently high in advance of the decision to delegate.
Unfortunately, the empirical work on central banks has focused
overwhelmingly on the relationship between independence and economic
outcomes instead of analysing the sources of the policy of delegation, with
the exception of Maxfield’s seminal research.44 This is an important
oversight. Investigating the timing of moves to central bank independence
in light of national macroeconomic conditions might provide clues as to the
fit between the functionalist story or the social institutions one. Maxfield’s
study of the sources of central bank independence in emerging economies,
which focuses on the desire of developing states to signal their credibility to
international investors, notes that central bank independence and inflation
do not seem to have a close temporal relationship, arguing that ‘inflation
was very severe in developing countries in the 1970s and 1980s, yet central
bank independence decreased in the 1970s and changed little in the 1980s’.45
A thorough econometric analysis is needed to assess fully the
relationship between macroeconomic indicators and decision to increase
central bank independence. A rough and ready preliminary look at the data
on inflation, growth, and employment appears to demonstrate a mixed
relationship to delegation (see Appendix 1). What is clear is that there may
be strong regional trends in the data. The newly independent states of the
former Soviet bloc have all moved to independent central banks in the
context of sometimes extremely high inflation, but the macroeconomic
indicators for these states are sketchy at best. Policy makers’ assessment of
the economic necessity of central bank independence was short-circuited, as
the newly created banks were given immediate legal independence after the
break-up of the Soviet Union. A second regional trend is apparent in the
European Union member states, which moved to make their banks
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independent in conjunction with the Maastricht Treaty on European Union

and its requirement for Economic and Monetary Union. The majority of EU
states had been experiencing very low inflation throughout the 1980s and
1990s accompanied by slow growth and high and persistent unemployment.
These economic conditions do not match those for which delegation of
authority for monetary policy would appear ideal.
If local material conditions do not appear to warrant the move to central
bank independence, this would make more plausible the contention of the
sociological approach. The adoption of a standardised form, institutional
isomorphism, may be occurring through a process of social diffusion of
organisational models. The conditions affecting diffusion in this account are
quite different from the conventional wisdom on central bank
independence.46 Such mimetic behaviour is a way to legitimise organisations,
particularly under conditions of uncertainty, where means–ends relationships
are unclear or there is no agreement on performance criteria.47 Imitation is a
rational strategy under the above conditions. Indeed, central banking is an
area of significant uncertainty, as questions are pervasive over the
measurement of the money supply, the formulation of economic projections,
and many of the causal linkages in the macroeconomy remain poorly
understood. Given the degree of uncertainty in the world, particularly when
it comes to the workings of the economy, how do social mechanisms of
diffusion provide a rational source of organisational forms? Two broad
categories of linked mechanisms for such diffusion are possible: coercive
isomorphism, in which political power and legitimacy are the driving forces;
and normative isomorphism, which arises from the processes of
professionalisation and socialisation within networks.48
Coercive isomorphism ‘results from both formal and informal pressures
exerted on organisations by other organisations upon which they are
dependent and by cultural expectations in the society within which
organisation functions’. These pressures can be ‘felt as force, as persuasion,
or as invitations to join in collusion’.49 For example, if carrots and sticks
(incentives and sanctions) are used on the part of international institutions,
such as the IMF, this could be felt as coercion on the part of domestic actors,
who may adopt central bank independence to meet the expectations of the
IMF rather than because their own national conditions seem to warrant it.
The broader package of domestic institutional reforms linked to the so-
called ‘Washington Consensus’ may be reflective of this process.50 The
European Union states can also be evaluated in terms of this sort of
dynamic, as legal independence on the part of the national central banks is
one of the criteria for entry into Economic and Monetary Union specified in
the Maastricht Treaty on European Union. While the IMF and the EU are
intergovernmental bodies, and thus one can argue that member nations in
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part determine these conditions, not all member governments have equal
say, either formally on the part of the IMF which awards votes in terms of
economic weight, or informally, in an EU where bargaining is never purely
symmetrical.
The second mechanism, normative isomorphism, can reinforce the first,
more coercive, one. Persuasion may occur through the development of
conceptual models, such as those promoting central bank independence
outlined in the first part of this article, which gain authority and legitimacy
by their advocacy on the part of prominent analysts. The models that
proscribe delegation to independent central banks derive from the discipline
of economics, which in the west is unified behind a single methodology and
intellectual cannon. These models are diffused through professionalised
networks of economists and economic policy makers and become
institutionalised in the IMF, or spread through shared education and
training, or through authoritative media sources and communities of
financiers and international investors.
The combination of coercive and normative pressure for conformity to
organisational form in the area of central banking are formidable. Hewing
to the precepts of central bank independence is thus a natural outcome for
transition states from the former Eastern Bloc, as the need to appear credible
and mimic the institutions of nations successful in stabilising their
economies is extremely pressing, driving institutional isomorphism
regardless of their particular local economic needs.51 Establishing legal
independence for their new central banks at the start of their transitions was
a way to legitimise the new regime and send a signal to allies, investors, and
international institutions that the government would play by the rules of the
global political economy. Developed states are not immune from these
processes either. For example, the Bank of Japan was made independent in
1996, after a multiple year recession that far from being marked by
inflation, has seen deflationary trends, with price increases hovering around
one per cent or below. The move to delegate monetary policy was taken as
a part of the ‘Big Bang’ package of economic reform, which proposed a
variety of deregulatory actions in an effort to jump-start the Japanese
economy and move its political economy a little closer to that of the Anglo-
Saxon model. Delegation was a rational choice in the context of the culture
of neoliberalism, but not to address the purported inflationary tendencies of
democracy as per the economic literature on central bank independence.
The European shift to central bank independence also challenges the
functional argument and points to the role of institutional diffusion of
organisational form. In the early 1990s, almost all of the EU countries with
dependent central banks moved to independence in anticipation of joining
EMU, for which such legal independence was a legal requirement. In 1992,
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Portugal and Italy delegated monetary policy to their central banks,

followed in 1993 by Belgium, France, and Greece, and, in 1994, Spain.
These states had largely achieved historically low rates of inflation by the
1990s, ranging from two to five per cent. The organisational form of their
national banks was dictated by the rules of entry into EMU, and the ECB,
which makes monetary policy for Euroland, is structured in the Maastricht
Treaty as the world’s most independent central bank. A coercive dynamic of
German negotiating strategy, which made the ECB’s independence a
necessity, plus the surrounding legitimation of normative support for
delegation across economic elites caused the independence criteria – not
objective material needs on the part of the majority of the member states,
whose monetary policies had been oriented towards price stability for some
time.52 Today, the ECB reigns as the most politically independent central
bank in the world. The Maastricht Treaty states that the ECB cannot seek or
take instructions from any EU or national entity or any other body. Its
independence is arguably more secure than that of any national bank
because a modification of its statute would require an amendment to the
Treaty, which can only occur with unanimous agreement among the
member states, rather than legislative majority within a regular political
system. Whereas most national central banks have a routinised system of
consultation with other government and societal bodies, the ECB is only
minimally linked to the political bodies of the EU. Policy makers from the
Council of Ministers and the Commission are granted observation status in
ECB meetings, and the ECB must fulfil a number of reporting commitments
to political bodies and the ECB’s president is required to appear before
committees of the European Parliament.
In sum, some of the most visible recent moves to central bank
independence do not seem to fit the material, functional model but rather
suggest the merits of testing an alternative approach focused on the
symbolic value of central bank independence and the legitimacy of non-
representative institutions as an organisational form. These cases suggest
that instead of assuming the validity of the conventional wisdom about
delegation in the monetary realm, we should undertake research agenda
which can systematically test alternative propositions and clarify the social
and political logics of central bank independence.
CONCLUSION
Central bank independence, one of the most prominent examples of

delegation to non-majoritarian institutions of the past few decades, rests on
contestable theoretical arguments and inconclusive empirical evidence
about the relationship between democracy, policy making, and economic
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outcomes. This article has challenged the logic of delegation in the
monetary policy realm, and linked delegation to substantive policy
outcomes which have important distributional effects not adequately
addressed by proponents of central bank independence. To understand why
governments have chosen this organisational form, an alternative theoretical
framework drawn from institutional sociology is proposed. In this
alternative view, delegation is a culturally rational strategy achieved
through coercive and normative processes of institutional isomorphism. The
symbolic properties of central bank independence, in signalling agreement
with a broader series of economic management principals and in conveying
credibility to external audiences about the economic and political character
of a government, are critical to explaining the spread of this organisational
form.
The tensions in the conceptual assertions of the theory of central bank
independence and scanty evidence on the beneficial economic effects of
delegation in this policy area raise important questions about the legitimacy
of this form of governance and the role of democratic accountability in
delegated institutions.53 Central bank independence is viewed by political,
business, and most academic elites as a highly desirable and legitimate
policy, which accounts for its spread as an organisational form. However,
delegation is not unproblematic. Central bank independence is designed to
skew policies away from the preference of the majority of voters, and
therefore does not necessarily have a broader legitimacy in terms of national
publics and societal groups.
The ECB is a particularly salient example of this conundrum of
legitimacy, for it embodies the narrow approbation among elites that is
necessary for social diffusion of such forms of delegation, but also
demonstrates the disquieting aspects of delegation from democratic
processes in the absence of a broad mandate for governance.54 The extreme
independence of the ECB is meant to reassure financial and business elites
that price stability will trump other economic goals and that Europe’s
economic policy will be appropriately insulated from the demands of labour
and other domestic interest groups. The decisions to free Europe’s central
bank from political control and focus narrowly on fighting inflation, in other
words, were not ‘technical’ or ‘apolitical’ as most advocates of
independence argue. Instead, as with all difficult policy choices, they
involved trade-offs among competing goods and will benefit some
constituencies more than others. This is not surprising or wrong, indeed it is
the meat and potatoes of politics, but it is often obscured in both the
academic and policy making discussion of central bank independence. The
attempt here has been to question some of the assumptions about the
functionality of central bank independence, and suggest instead that it might
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be better understood as a social process that is highly political in its both its
sources and effects.
NOTES
For very helpful comments on this paper, I thank Nicholas Jabko, Keith Whittington, Mark
Thatcher, Alec Stone Sweet, participants in the workshop at the European University Institute,
and an anonymous reviewer. I also thank Sheri Berman for invaluable discussions on the topic of
democracy and central banking. Elizabeth Bloodgood provided excellent research assistance.
1. S. Maxfield, Gatekeepers of Growth: The International Political Economy of Central

Banking in Developing Countries (Princeton: Princeton University Press 1997), p.3.
2. K. Dyson, K. Featherstone and G. Michalopoulos, ‘Strapped to the Mast: EC Central
Bankers between Global Financial Markets and Regional Integration’, Journal of European
Public Policy 2/3 (Sept. 1995), pp.465–87; Robert Elgie and Erik Jones, ‘Agents, Principals
and the Study of Institutions: Constructing a Principal-Centred Account of Delegation’,
Working Documents in the Study of European Governance 5 (Nottingham: The Centre for the
Study of European Governance, University of Nottingham Dec. 2000).
3. Reviews of the literature include T. Moe, ‘The New Economics of Organization’, American
Journal of Political Science 28 (1984), pp.739–77; K. Shepsle and B. Weingast, ‘Positive
Theories of Congressional Institutions’, Legislative Studies Quarterly 19/149 (1994),
pp.145–79.
4. M. Pollack, ‘Delegation, Agency, and Agenda Setting in the European Community’,
International Organization 51/1 (Winter 1997), pp.99–134.
5. W. Nordhaus, ‘The Political Business Cycle’, Review of Economic Studies 42 (1975),
pp.169–90; A. Alesina, ‘Macroeconomics and Politics’, in S. Fischer (ed.), NBER
Macroeconomics Annual 1988 (Cambridge: MIT Press 1988), pp.13–69; A. Alesina,
‘Politics and Business Cycles in Industrial Democracies’, Economic Policy 4 (April 1989),
pp.57–98.
6. Alesina, ‘Macroeconomics and Politics’.
7. D.A. Hibbs, ‘Political Parties and Macroeconomic Policy’, The American Political Science
Review 71 (Dec. 1977), pp.1467–87; D. Cameron, ‘The Expansion of the Public Economy:
A Comparative Analysis’, The American Political Science Review 72 (Dec. 1978),
pp.1243–61.
8. The rational expectations approach argues that actors in the economy will catch on to the
manipulation of the money supply and will start to figure in the inflationary effects of
increased money supply into their wage demands, prices, and investment decisions. As they
do so, these inflationary expectations will themselves create inflation. See R.J. Barro and D.
Gordon, ‘Rules, Discretion, and Reputation in a Model of Monetary Policy’, Journal of
Monetary Economics 12 (July 1983), pp.10–121; S. Lohmann, ‘Optimal Commitment in
Monetary Policy: Credibility versus Flexibility’, American Economic Review 82 (March
1992), pp.273–86; A. Cukierman, Central Bank Strategy, Credibility and Independence:
Theory and Evidence (Cambridge: MIT Press 1992).
9. A. Alesina and G. Tabellini, ‘Credibility and Politics’, European Economic Review 32
(1988), pp.542–50.
10. J. De Haan, ‘The European Central Bank: Independence, Accountability and Strategy: A
Review’, Public Choice 93 (1997), pp.395–426, especially p.398.
11. The validity of the assumptions of rational expectations that underpins the central bank
independence logic constitutes a separate, additional critique. See C. Goodhart, ‘Game
Theory for Central Bankers’, Journal of Economic Literature 32 (March 1994), pp.101–14.
An analysis of the ideological dimensions of the rational expectations approach is Ilene
Grabel, ‘Ideology and Power in Monetary Reform: Explaining the Rise of Independent
Central Banks and Currency Boards in Emerging Economies’, presented at a conference on
‘Power, Ideology, and Conflict: The Political Foundations of 21st Century Money’, 31
March–2 April 2000, Cornell University, Ithaca, NY. Grabel also stresses the distributional
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consequences of delegation.
12. J.E. Stiglitz, ‘Central Banking in a Democratic Society’, Economist 142/2 (1998),
pp.199–226, quote p.216.
13. This can be characterised as a conflict between a traditional Keynesian view of
macroeconomic policy, which prescribes demand management through activist monetary
policy, and a more neoliberal monetarist view, which prescribes targeting inflation control as
the singular goal of a central bank. See P. Hall, ‘The Movement from Keynesianism to
Monetarism’, in S. Steinmo, K. Thelen and F. Longstreth (eds.), Structuring Politics (New
York: Cambridge University Press 1992); P. Hall, ‘Policy Paradigms, Social Learning, and
the State’, Comparative Politics 25/3 (April 1993), pp.275–96; K. Dyson, Elusive Union:
The Process of Economic and Monetary Union in Europe (London: Longman 1994); and K.
McNamara, The Currency of Ideas: Monetary Politics in the European Union (Ithaca:
Cornell University Press 1998).
14. An exception is the societal analysis provided in J.B. Goodman, ‘The Politics of Central
Bank Independence’, Comparative Politics 23/3 (1991), pp.329–49.
15. K. Rogoff, ‘The Optimal Degree of Commitment to an Intermediate Monetary Target’,
Quarterly Journal of Economics 100/4 (1985), pp.1169–89.
16. See Goodman, ‘Central Bank Independence’, especially pp.334–6, on historical variations in
independence in European central banks.
17. E.g. R.D. Kiewert and M.D. McCubbins, The Logic of Delegation: Congressional Parties
and the Appropriations Process (Chicago: University of Chicago Press 1991), p.5. See Elgie
and Jones, ‘Agents, Principals and the Study of Institutions’.
18. M. McCubbins and T. Page, ‘A Theory of Congressional Delegation’, in M. McCubbins and
Terry Sullivan (eds.), Congress: Structure and Policy (New York: Cambridge University
Press 1987).
19. A. Posen, ‘Why Central Bank Independence Does Not Cause Low Inflation: There Is No
Institutional Fix for Politics’, in R. O’Brien (ed.), Finance and the International Economy 7
(Oxford: Oxford University Press 1993).
20. J. Goodman, Monetary Sovereignty: The Politics of Central Banking in Western Europe (Ithaca:
Cornell University Press 1992); K.R. McNamara and E. Jones, ‘The Clash of Institutions:
Germany in European Monetary Affairs’, German Politics and Society 14 (Fall 1996), pp.5–31.
21. A. Drazen, ‘The Political Business Cycle after 25 Years’, in B. Bernake and K. Rogoff (eds.),
NBER Macroeconomics Annual, 2000 (Cambridge, MA: NBER 2000), pp.3–4. Drazen does
not address, however, a more nuanced and promising analysis, which incorporates the role
of domestic institutions and international capital mobility: W.R. Clark and M. Hallerberg,
‘Mobile Capital, Domestic Institutions, and Electorally Induced Monetary and Fiscal
Policy’, American Political Science Review 94 (June 2000), pp.323–46.
22. See K. McNamara, The Currency of Ideas, ch.6; G. Garrett, Partisan Politics in a Global
Economy (Cambridge: Cambridge University Press 1998).
23. Stiglitz, ‘Central Banking’. An earlier assessment of inflation along similar lines is B. Barry,
‘Does Democracy Cause Inflation?’ in L.N. Lindberg and C. Maier (eds.), The Political
Economy of Inflation and Economic Stagnation (Washington, DC: Brookings Institution
1985), pp.280–317.
24. M. Bruno and W. Easterly, ‘Inflation and Growth: In Search of a Stable Relationship’,
Federal Reserve Bank of St. Louis Review 78 (May–June 1996), pp.139–46.
25. R.J. Barro, Determinants of Economic Growth (Cambridge: MIT Press 1997); S. Fischer,
‘The Role of Macroeconomic Factors in Growth’, Journal of Monetary Economics 32/3
(1993), pp.485–512.
26. Stiglitz, ‘Central Banking’, pp.212–13.
27. Ibid., p.215.
28. E.g. Cukierman, Central Bank Strategy, Credibility and Independence; T. Persson and G.
Tabellini (eds.), Monetary and Fiscal Policy (Cambridge: MIT Press 1994); S. Eijffinger and
J. De Haan, ‘The Political Economy of Central Bank Independence’, Special Papers in
International Economics 19 (Princeton: International Finance Section, Princeton University
May 1996).
29. J. Forder, ‘Central Bank Independence: Reassessing the Measurements’, Journal of
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Economic Issues 33 (March 1999), pp.23–40.

30. Posen, ‘Why Central Bank Independence Does Not Cause Low Inflation’.
31. Goodman, ‘The Politics of Central Bank Independence’.
32. Goodman, Monetary Sovereignty; McNamara and Jones, ‘The Clash of Institutions’; P. Hall
and R. Franzese, ‘Mixed Signals: Central Bank Independence, Coordinated Wage-
Bargaining, and European Monetary Union’, International Organization 52/3 (Summer
1998), pp.505–36.
33. I offer a suggestive account here; a systematic empirical study of the motivations of national
governments is necessary to ascertain whether the sociological explanation is correct.
34. R.W. Scott, J. Meyer and associates, Institutional Environments and Organizations:
Structural Complexity and Individualism (Thousand Oaks, CA: Sage 1994); J. Meyer and B.
Rowan, ‘Institutionalized Organizations: Formal Structures as Myth and Ceremony’,
American Journal of Sociology 83/2 (1977), pp.340–63; W.W. Powell and P.J. DiMaggio,
The New Institutionalism in Organizational Analysis (Chicago: University of Chicago Press
1991); R.W. Scott and J. Meyer, ‘Developments in Institutional Theory’, in Meyer and Scott,
Institutional Environments and Organization, pp.1–8.
35. Maxfield, Gatekeepers of Growth.
36. Scott and Meyer, ‘Developments in Institutional Theory’, p.2.
37. McNamara and Jones, ‘The Clash of Institutions’.
38. See for example, E. Kapstein, ‘Between Power and Purpose: Central Bankers and the Politics
of Regulatory Convergence’, International Organization 46/1 (Winter 1992), pp.265–88;
G.J. Ikenberry, ‘A World Economy Restored: Expert Consensus and the Anglo-American
Postwar Settlement’, International Organization 46/1 (Winter 1992), pp.289–322; P. Hall,
‘The Movement from Keynesianism to Monetarism’; K. McNamara, ‘Where Do Rules
Come From? The Creation of the European Central Bank’, in N. Fligstein, W. Sandholtz and
A. Stone Sweet (eds.), The Institutionalization of Europe (Oxford: Oxford University Press
2001).
39. See W.J. Barber, ‘Chile con Chicago: A Review Essay’, Journal of Economic Literature 33/4
(Dec. 1995), pp.1941–9; M. Fourcade-Gourinchas, ‘The National Trajectories of Economic
Knowledge: Discipline and Profession in the United States, Great Britain and France’
(unpublished Ph.D. thesis, University of Harvard, 2000).
40. The Financial Times, 12 Nov. 1992, p.20; The Economist, 28 Aug. 1993, p.16.
41. Scott and Meyer, ‘Developments in Institutional Theory’, p.3.
42. This debate is central to the academic discussion of globalisation. See S. Berger and R. Dore,
National Diversity and Global Capitalism (Ithaca: Cornell University Press 1996).
43. P. Tolbert and L. Zucker, ‘Institutional Sources of Change in the Formal Structure of
Organizations: The Diffusion of Civil Service Reforms, 1880–1935’, Administrative Science
Quarterly 28/1 (1983), pp.22–39; P. DiMaggio and W. Powell, ‘The Iron Cage Revisited:
Institutional Isomorphism and Collective Rationality in Organizational Fields’, American
Sociological Review 48 (April 1983), pp.147–60.
44. Maxfield, Gatekeepers of Growth.
45. Ibid., p.70.
46. D. Strang and J. W. Meyer , ‘Institutional Conditions for Diffusion’, ch. 5 in Scott and Meyer,
Institutional Environments and Organization, pp.100–112.
47. J.G. March and J.P. Olson, Ambiguity and Choice in Organizations (Bergen:
Universitetsforlaget 1976); DiMaggio and Powell, ‘The Iron Cage Revisited’.
48. This analysis draws on DiMaggio and Powell’s classic analysis of the sources of
organisational diffusion, ‘The Iron Cage Revisited’. They also highlight a third process,
mimetic isomorphism, where copying occurs because of uncertainty. Here, I assume
uncertainty as a background causal condition, and focus on the two mechanisms by which
uncertainty gets translated into outcomes, coercion and normative persuasion.
49. DiMaggio and Powell, ‘The Iron Cage Revisited’, p.67.
50. D. Rodrik, ‘Does One Size Fit All?’ Brookings Trade Policy Forum 1999 (Washington DC:
Brookings Institution 1999).
51. A similar dynamic may have driven the copying of Western-style constitutions in Eastern
Europe.
251wep03.qxd 18/12/2001 11:37 Page 71

52. McNamara, The Currency of Ideas, ch.6.
53. S. Berman and K.R. McNamara, ‘Bank on Democracy: Why Central Banks Need Public
Oversight’, Foreign Affairs 78 (March/April 1999), pp.2–8.
54. N. Fligstein and K.R. McNamara, ‘The Promise of EMU and the Problem of Legitimacy’,
Center for Society and Economy Policy Newsletter (University of Michigan Business
School, Spring 2000, www.bus.umich.edu/cse); see also A. Verdun, ‘The Institutional
Design of EMU: A Democratic Deficit?’, Journal of Public Policy 18/2 (1998), pp.107–32;
and R. Elgie, ‘Democratic Accountibility and Central Bank Independence: Historical and
Contemporary, National and European Perspectives’, West European Politics 21/3 (July
1998), pp.53–76.
APPENDIX 1
L E G A L CE NT RAL BANK I NDE P E NDE NCE A N D MA C R O EC O N O MIC TR EN D S
( 5 YE ARS P RE CED IN G )
Country Date of Five Years Inflation Growth Unemployment

Legal CBI Prior
Latin American States

Argentina 1992 24.9 8.7 7.0
1991 171.7 8.9 6.0
1990 2314.7 0.1 9.0
1989 3080.5 -6.2 7.0
1988 343.0 -1.9 6.0
1987 131.3 2.6 5.0
Chile 1989 17.0 10.0 5.0
1988 14.7 7.4 6.0
1987 19.9 5.7 8.0
1986 19.5 5.7 9.0
1985 30.7 2.4 12.0
1984 19.9 7.8
Colombia 1992 27.0 3.5 9.0
1991 30.5 2.1 10.0
1990 29.1 4.3 10.0
1989 25.9 3.4 9.0
1988 28.1 4.1
1987 23.3 5.4
Ecuador 1992 55.0 3.7 9.0
1991 48.8 4.4 9.0
1990 48.4 2.3 6.0
1989 75.7 0.2 8.0
1988 58.2 10.5 7.0
1987 29.5 -6.0 7.0
Mexico 1993 97.5 2.0 3.0
1992 15.5 3.6 3.0
1991 22.7 3.6 3.0
1990 26.7 4.4 *
1989 20.0 3.3 *
1988 114.2 1.2 *
Venezuela 1992 31.4 7.3 8.0
1991 34.2 10.4 10.0
1990 40.7 6.5 10.0
1989 84.5 -8.6 9.0
1988 29.4 5.8 7.0
1987 28.1 3.6 9.0
251wep03.qxd 18/12/2001 11:37 Page 72
A P P E N D I X 1 (Continued)

Legal CBI Prior
Transitional Economies
Albania 1991 35.5 -27.7 9.0
1990 * -10.0 10.0
1989 * 9.8 7.0
1988 * -1.4 7.0
1987 * -0.8 6.0
1986 * 5.6 6.0
Belarus 1994 2200.0 -13.2 2.0
1993 1188.0 -7.0 1.0
1992 1074.5 -9.7 1.0
1991 94.1 * 0.0
1990 * * *
1989 * * *
Bulgaria 1991 333.5 -11.7 11.0
1990 21.6 -9.1 2.0
1989 6.4 -0.5 *
1988 2.5 2.5 *
1987 2.7 5.7 *
1986 2.7 5.6 *
Czech Republic 1993 20.8 0.6 4.0
1992 11.0 -8.5 *
1991 59.0 -15.9 *
1990 10.8 -0.4 *
1989 1.4 4.5 *
1988 0.2 2.5 *
Estonia 1993 89.0 -8.2 8.0
1992 1069.0 -23.3 5.0
1991 210.6 -11.9 2.0
1990 * * 1.0
1989 * * 1.0
1988 * * *
Hungary 1991 36.4 -11.9 9.0
1990 28.9 -4.3 2.0
1989 17.0 -0.2 *
1988 15.5 -0.1 *
1987 8.6 4.1 *
1986 5.3 4.7 *
Kazahkstan 1993 1662.3 -9.2 1.0
1992 2568.0 -14.0 1.0
1991 147.0 -13.0 0.0
1990 * * *
1989 * * *
1988 * * *
Latvia 1992 951.2 -32.9 2.0
1991 124.4 -8.3 *
1990 * * *
1989 * * *
1988 * * *
1987 * * *
251wep03.qxd 18/12/2001 11:37 Page 73


Legal CBI Prior
Lithuania 1994 72.1 -9.8 5.0

1993 410.4 -16.2 4.0
1992 1020.3 -35.0 4.0
1991 224.7 -13.4 0.0
1990 * * *
1989 * * *
Poland 1991 and 1992 70.3 -7.6 *
1990 585.8 -11.6 *
1989 251.5 0.2 *
1988 60.2 4.1 *
1987 25.2 2.0 *
1986 17.8 4.2 *
Romania 1991 161.1 -15.1 3.0
1990 4.7 -7.4 *
1989 0.9 -5.8 *
1988 2.6 -0.5 *
1987 1.1 0.8 *
1986 0.7 2.3 *
Russia 1993 874.7 -10.4 6.0
1992 1353.0 -18.5 5.0
1991 92.7 -12.9 0.0
1990 * * *
1989 * * *
1988 * * *
Slovak Republic 1993 23.0 -3.7 13.0
1992 11.0 -8.5 11.0
1991 59.0 -15.9 7.0
1990 10.8 -0.4 *
1989 1.4 4.5 *
1988 0.2 2.5 *
Ukraine 1992 1445.3 -14.0 *
1991 91.2 -13.4 *
1990 * * *
1989 * * *
1988 * * *
1987 * * *
Advanced Economies
Belgium 1993 3.8 -1.5 8.8
1992 3.6 1.6 7.3
1991 3.2 1.6 7.0
1990 3.5 3.0 7.0
1989 3.1 3.6 8.0
1988 1.2 4.7 10.0
France 1993 2.8 2.7 11.6
1992 2.9 2.2 10.3
1991 2.8 1.2 9.3
1990 3.1 2.2 8.9
1989 3.2 4.1 9.4
1988 2.8 4.5 10.0
251wep03.qxd 18/12/2001 11:37 Page 74

Legal CBI Prior
Greece 1993 14.5 -1.6 9.7

1992 14.8 0.7 8.7
1991 19.5 3.1 8.0
1990 20.4 2.7 7.0
1989 13.7 3.8 8.0
1988 13.5 4.5 8.0
Italy 1992 5.6 1.3 11.1
1991 7.3 1.4 10.9
1990 7.5 2.2 11.0
1989 6.2 2.9 12.0
1988 6.7 4.1 12.0
1987 6.0 3.1 12.0
Portugal 1992 10.6 1.9 4.1
1991 11.4 2.3 4.0
1990 13.4 4.4 5.0
1989 12.6 5.1 5.0
1988 9.5 7.5 6.0
1987 9.4 6.4 8.0
Spain 1994 3.8 2.3 24.2
1993 4.3 -1.2 22.7
1992 6.9 0.7 18.4
1991 5.9 2.3 16.0
1990 6.7 3.7 16.0
1989 6.8 4.7 17.0
New Zealand 1989 7.5 0.9 7.0
1988 6.4 -0.4 6.0
1987 15.7 0.4 4.0
1986 13.2 2.1 4.0
1985 15.4 0.8 *
1984 6.2 4.9 *
Japan 1996 -1.4 5.0 3.3
1995 -0.6 1.5 3.1
1994 0.2 0.6 2.9
1993 0.6 0.3 2.5
1992 1.7 1.0 2.2
1991 1.9 4.4 2.1
Britain 1998 2.9 2.2 4.7
1997 2.9 3.5 5.7
1996 3.3 2.6 7.4
1995 2.5 2.8 8.1
1994 1.5 4.4 9.4
1993 2.8 2.3 10.3
Ireland 1998 5.6 8.9 7.4
1997 3.5 10.7 9.8
1996 2.3 7.7 11.5
1995 2.7 9.5 12.1
1994 1.7 5.8 14.1
1993 5.2 2.6 15.5
251wep03.qxd 18/12/2001 11:37 Page 75


Legal CBI Prior
Finland 1998 2.9 5.0 11.4

1997 2.1 6.3 12.6
1996 -0.2 4.0 14.6
1995 4.1 3.8 15.4
1994 2.0 4.0 16.6
1993 2.3 -1.1 16.4
Netherlands 1998 1.9 3.7 4.1
1997 2.0 3.8 5.5
1996 1.1 3.0 6.6
1995 1.8 2.3 7.1
1994 2.3 3.2 7.6
1993 1.9 0.8 6.5
Sweden 1999 0.5 3.8 5.6
1998 1.3 3.0 6.5
1997 1.2 2.0 8.0
1996 1.4 1.1 8.1
1995 3.5 3.7 7.7
1994 2.4 4.1 8.0
Non-Latin American Developing States

Algeria 1991 22.8 0.2 21.0
1990 16.7 -1.4 20.0
1989 9.2 4.9 17.0
1988 5.9 -1.9 *
1987 5.9 -0.7 *
1986 14.0 -0.2 *
Egypt 1992 13.6 0.4 9.0
1991 19.8 1.2 10.0
1990 16.7 2.3 9.0
1989 21.4 2.2 7.0
1988 18.8 3.5 *
1987 19.7 8.7 *
Turkey 1989 63.3 -0.3 9.0
1988 75.4 4.4 8.0
1987 38.8 7.2 *
1986 34.6 8.7 *
1985 45.0 4.5 11.0
1984 48.3 6.3 *
Pakistan 1993 9.8 1.9 5.0
1992 9.4 7.8 6.0
1991 11.7 7.7 6.0
1990 9.7 5.6 3.0
1989 7.2 4.7 3.0
1988 3.3 4.8 3.0
Vietnam 1992 25.0 5.0 *
1991 67.0 4.0 *
1990 67.0 5.1 *
1989 35.0 8.1 *
1988 394.0 5.1 *
1987 316.7 2.5 *
251wep03.qxd 18/12/2001 11:37 Page 76
Notes: * = Data not available

Data on legal CBI comes from Maxfield, Gatekeepers of Growth: The International
Political Economy of Central Banking in Developing Countries (Princeton: Princeton
University Press, 1997), Table 4.1. Post-1994 CBI data comes from the European
Monetary Institute, Convergence Reports, 1998 and 1999. Data is given for the five years
prior to legal independence (I-1, I-2, I-3...) for three measures: inflation, growth and
unemployment rate. Inflation is the annual percent change in the price deflator of the
national GDP. Growth is the annual percent change in national GDP. Poland starts from
1991 (CBI date used). Czech Republic and Slovak Republic figures prior to 1993 are
Former Czechoslovakia numbers. Macroeconomic data comes from World Bank, World
Development Indicators, 2000 or from IMF, World Economic Outlook, October 1992,
October 1993, and May 2000.

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West European Politics

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technocratic expertise does not apoliticise monetary policy. Rather,

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THE THEORY OF CENTRAL BANK I NDE P E N D E N C E

Central bank independence is one of the most prominent examples of the

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THE POLITI CS OF CENTRAL BANK I ND E P E N D E N C E

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understandings and relationships underpins the Bundesbank’s success in

DELEGATI ON AND OUTCOM ES I N PRAC T I C E

RATIONAL FI CTI ONS 57

emptive contractionary policies that attempt to dampen inflation while

RATIONAL FI CTI ONS 59

If central bank independence rests on shakier functionalist foundations than

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rationalisation, that is, ‘the creation of cultural schemes defining means–

PROBING THE SOURCES OF CENTRAL B A N K I N D E P E N D E N C E

RATIONAL FI CTI ONS 63

independent in conjunction with the Maastricht Treaty on European Union

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Portugal and Italy delegated monetary policy to their central banks,

Central bank independence, one of the most prominent examples of

RATIONAL FI CTI ONS 67

1. S. Maxfield, Gatekeepers of Growth: The International Political Economy of Central

RATIONAL FI CTI ONS 69

Economic Issues 33 (March 1999), pp.23–40.

RATIONAL FI CTI ONS 71

Country Date of Five Years Inflation Growth Unemployment

Latin American States

Country Date of Five Years Inflation Growth Unemployment

RATIONAL FI CTI ONS 73

Country Date of Five Years Inflation Growth Unemployment

Lithuania 1994 72.1 -9.8 5.0

Country Date of Five Years Inflation Growth Unemployment

Greece 1993 14.5 -1.6 9.7

RATIONAL FI CTI ONS 75

Country Date of Five Years Inflation Growth Unemployment

Finland 1998 2.9 5.0 11.4

Non-Latin American Developing States

Notes: * = Data not available

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