The Limits of Delegation: Veto Players, Central Bank Independence, and the Credibility of Monetary Policy

Governments unable to make credible promises hinder economic development and effective policymaking. Scholars have focused considerable attention on checks and balances and the delegation of authority to independent agencies as institutional solutions to this problem. The political conditions under which these institutions enhance credibility, rather than policy stability, are still unclear, however. We show that checks—multiple veto players—enhance credibility, depending on the extent of uncertainty about the location of the status quo, on how agenda control is allocated among the veto players, and on whether veto players have delegated policymaking authority to independent agencies. In the context of monetary policy and independent central banks, we find evidence supporting the following predictions: Delegation is more likely to enhance credibility and political replacements of central bank governors are less likely in the presence of multiple political veto players; this effect increases with the polarization of veto players.We have benefited from the generous advice of many people, including Alberto Alesina, Tim Besley, Georgios Chortareas, Roberta Gatti, Simon Hug, Stephan Haggard, Witold Henisz, Aart Kraay, Francesca Recanatini, and Mary Shirley, and from comments of seminar participants at DELTA (Paris), George Mason, and Oxford. Three anonymous referees and the editor were especially helpful. This paper's findings, interpretations, and conclusions are entirely those of the authors and do not necessarily represent the views of The World Bank, its executive directors, or the countries they represent.