THIS BOOK introduces a new approach to the politics of money focused on the decisive role played by central bankers themselves. There is a surprisingly large gap between what we know about the behavior of ideal central bankers, and how real central bankers make crucial decisions about interest rates, inflation, unemployment, and economic growth. To understand how monetary policy really works, I offer practical means of measuring, explaining, and predicting central bankers' preferences and the effects of those preferences on economic outcomes.

I argue that patrons, or “shadow principals” in the financial sector and partisan governments, shape the beliefs and career incentives of bureaucratic agents otherwise legally insulated from outside pressure. This claim is simple but has important implications. Focusing on developed countries between the end of Bretton Woods and the birth of the euro, with sidetrips to developing countries and earlier periods, I show that career theories of central banker behavior explain substantial differences in interest rate decisions, inflation rates, and in some cases, real economic performance, especially in countries with independent central banks.

The concept of shadow principals lets us revisit the role of outside pressures on monetary policy. The political influence of banks is now a critical public issue in many industrial democracies.