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Political System Transparency and Monetary Commitment Regimes

Published online by Cambridge University Press:  09 July 2003

J. Lawrence Broz
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Abstract

Central bank independence (CBI) and fixed exchange rates are alternative monetary commitments that differ in transparency. While CBI is opaque and difficult to monitor, a commitment to a fixed exchange rate is easily observed. Political systems also vary in terms of transparency. I argue that the transparency of monetary commitments and the transparency of political systems are substitutes. Where political decision making is opaque (autocracies), governments must look to a commitment that is more transparent and constrained (fixed exchange rates) than the government itself. The transparency of the monetary commitment substitutes for the transparency of the political system to engender low inflation. Where the political process is transparent (democracies), a formal commitment to CBI can produce lower inflation because private agents and the political opposition are free to detect and punish government interference with the central bank. Statistical results indicate that (1) autocracies are more likely to adopt exchange-rate pegs than democracies, and (2) CBI is effective in limiting inflation in nations with high levels of political transparency.

Type
Research Article
Information
International Organization , Volume 56 , Issue 4 , Autumn 2002 , pp. 861 - 887
Copyright
Copyright © The IO Foundation 2002

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