Rational fictions: Central bank independence and the social logic of delegation

Abstract:

The conventional wisdom in support of central bank independence rests on a series of contestable arguments about the relationship between democracy, policy making, and economic outcomes. Empirical work casts doubt on the severity of the inflationary problems purportedly solved by delegation to independent central banks, as well as raising questions about linkages between delegation and superior economic outcomes. So why delegate? Theories of institutional isomorphism, or the copying of organisational models, provide an alternative sociological explanation of the diffusion of central bank independence. Drawing on this approach, it is argued that governments choose central banks because delegation has important legitimising and symbolic properties that are attractive to political leaders in times of economic uncertainty. Delegation to independent central banks is rational, efficient, and acceptable in a democratic society because of the cultural processes which define it as such, not because of the functional requirements of economic management.