Central Bank Independence and Clarity of Responsibility

• In Event: Taxation, Political Economy, and Voter Turnout

Abstract

This research investigates the role of central bank independence (CBI) in moderating voters' assignment of responsibility for macroeconomic performances to governments. It suggests that the legal delegation of monetary policy to central banks that constrains governments' ability to stabilize macroeconomic shocks weakens voters' willingness to punish those governments for such negative economic outcomes as low growth or high unemployment. The extant literature on CBI indicates that independent central banks have not only acquired an exclusive ownership of monetary policy but also restricted autonomy of governments even in areas including fiscal and exchange rate policies to attain a goal of price stability. It implies that independent central banks can effectively shape conditions of the economy and even pressure governments to sacrifice other macroeconomic goals like high growth or low unemployment for the sake of low inflation. Yet despite their substantive economic clout, it seems still unclear whether to the extent that independent central banks take part in managing the economy, they also share a burden of responsibility for performances of the economy with elected governments. I argue that CBI obscures the clarity of incumbent governments' responsibility and thus mutes the effects of economic voting by transferring significant parts of economic policy authority from governments to independent central banks. Employing cross-sectional and individual-level data on 175 elections from 1996 to 2015 provided by the Comparative Study of Electoral Systems, this research demonstrates that the effects of economic voting are weaker in countries where central banks enjoy higher legal independence. The results show that the conditioning effects are most pronounced among sophisticated voters who can understand the complex institutional context of macroeconomic policymaking where with the strong central bank independence, governments' room to maneuver is limited. My findings advance both 'clarity of responsibility' literature that has exclusively focused on the influence of 'political' contexts on economic voting and CBI literature that has not seriously tackled the implication of the emergence of independent central banks on electoral accountability of governments for economic outcomes.

Author

• Hyunwoo Kim, Michigan state university