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Banking on Reform

Political Parties and Central Bank Independence in the Industrial Democracies

William Bernhard

Publication Year: 2002

Banking on Reform examines the political determinants of recent reforms to monetary policy institutions in the industrial democracies. With these reforms, political parties have sought to draw on the political credibility of an independent central bank to cope with electoral consequences of economic internalization and deindustrialization. New Zealand and Italy made the initial efforts to grant their central banks independence. More recently, France, Spain, Britain, and Sweden have reformed their central banks' independence. Additionally, members of the European Union have implemented a single currency, with an independent European central bank to administer monetary policy. Banking on Reform stresses the politics surrounding the choice of these institutions, specifically the motivations of political parties. Where intraparty conflicts have threatened the party's ability to hold office, politicians have adopted an independent central bank. Where political parties have been secluded from the political consequences of economic change, reform has been thwarted or delayed. The drive toward a single currency also reflects these political concerns. By delegating monetary policy to the European level, politicians in the member states removed a potentially divisive issue from the domestic political agenda, allowing parties to rebuild their support constructed on the basis of other issues. William T. Bernhard provides a variety of evidence to support his argument, such as in-depth case accounts of recent central bank reforms in Italy and Britain, the role of the German Bundesbank in the policy process, and the adoption of the single currency in Europe. Additionally, he utilizes quantitative and statistical tests to enhance his argument. This book will appeal to political scientists, economists, and other social scientists interested in the political and institutional consequences of economic globalization. William T. Bernhard is Assistant Professor of Political Science, University of Illinois, Urbana-Champaign.

Published by: University of Michigan Press


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pp. vii


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pp. ix


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pp. xi

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pp. xiii-xiv

This project evolved from my graduate work at Duke University. My greatest intellectual debt goes to my dissertation advisor, Peter Lange. Peter has shaped this project in innumerable direct and perhaps more significantly, indirect ways. I thank him for his guidance, advice, and above all, patience. Bob Batesand Herbert Kitschelt also strongly influenced my intellectual development....

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Chapter 1. Political Parties and Central Bank Independence

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pp. 1-18

Central banks stand at the intersection of economics and politics. These bureaucratic institutions implement monetary policy by regulating the supply of money and credit to the economy. Both academic and popular accounts emphasize how a country's central bank significantly shapes its economic destiny (e.g., Beckner 1996; Deane and Pringle 1995; Greider 1987; Marsh 1992). In...

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Chapter 2. What Is Central Bank Independence?

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pp. 19-35

In the 1990s, central bank independence became a universal catchphrase for economists, international agencies, and policymakers interested in improving economic performance. Nevertheless, the term independence meant different things to different people (e.g., de Haan 1997; Forder 1998b; Mangano 1998; Prast 1996; Waller 1995). Political economists often use the concept of...

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Chapter 3. Monetary Policy, Intraparty Conflict, and Central Bank Independence

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pp. 37-55

The design of central bank institutions represents an explicitly political choice. Therefore, an explanation of the variation of central bank institutions must consider politicians' interests, particularly their desire to attain and hold office. It must take into account how different electoral, legislative, and government institutions affect politicians' incentives over central bank structure. Finally, it...

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Chapter 4. Central Bank Independence and the Politics of Monetary Policy: The German Bundesbank in the Policy Process

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pp. 57-71

Monetary policy reflects the strategic interaction of cabinet ministers, legislators, and central bankers in the policy process-strategic interaction that is conditioned by the formal and legal structure of the central bank. With an independent central bank, the cabinet has few direct controls over the central bank. The bank's governing board typically includes individuals appointed by a...

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Chapter 5. Federalism and Central Bank Independence

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pp. 73-98

Political economists have long noted the association between federalism and central bank independence (e.g., Banaian, Laney, and Willett 1983; Lohmann1998a; Posen 1995). Federal systems, in which political authority is divided be tween the central government and constituent units, tend to have independent central banks. Germany, Switzerland, and the United States-all federal ...

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Chapter 6. Economic Internationalization, Intraparty Conflict, and Central Bank Reform

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pp. 99-124

Throughout much of the postwar period, the level of central bank independence in most industrial democracies remained relatively stable. In the late 1980s and early 1990s, however, politicians in many industrial democracies reformed their central bank institutions, granting their central banks increased independence from direct political control ...

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Chapter 7. Party System Change and Central Bank Reform in Italy and Britain

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pp. 125-154

Throughout the industrial democracies, economic internationalization has created potential conflicts over economic and monetary policy within the leading governing parties. Increased levels of economic openness have altered the policy preferences of key constituent groups, diversifying the demands made on these parties. At the same time, the ability of parties in office to deliver...

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Chapter 8. Europe’s Commitment to the Single Currency

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pp. 155-176

After more than a decade of stagnation, the European Community enjoyed a revitalization in the 1980s. The 1986 Single European Act made concrete plans for the completion of the internal market, a goal established in the 1950s, by the end of 1992. Unlike any European initiative before it, the"1992 program" captured the public's imagination and generated widespread excitement...

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Chapter 9. Conclusion

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pp. 177-180

The wave of central bank reform in the late 1980s and 1990s represents a remarkable change in how countries administer monetary policy. Among the industrial democracies, an independent central bank has become the norm rather than the exception. In most countries, elected officials no longer control interest rates or the money supply but entrust the management of these policy...

Appendix: A Model of Monetary Policy-Making

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pp. 181-197


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pp. 199-208


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pp. 209-229


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pp. 231-237

E-ISBN-13: 9780472023134
E-ISBN-10: 0472023136
Print-ISBN-13: 9780472112548
Print-ISBN-10: 0472112546

Page Count: 256
Illustrations: 9 drawings, 9 tables
Publication Year: 2002