The Institutional Foundations of Monetary Commitment: A Comparative Analysis

This paper adopts an institutional perspective on the problem of designing governance structures for restraining monetary policy. This perspective broadens the standard literature on central bank independence in several dimensions. First, although it recognizes that an independent central bank is one important institutional arrangement, it also considers a much broader variety of institutional arrangements that have been used (historically and today) to restrain monetary policy. Second, it considers not only the formal or legal institutional arrangements governing monetary policy, but also the broader environment, or institutional endowment, in which those formal arrangements are embedded. Third, this paper is concerned with the problem of enforcement: given the institutional endowment in which formal monetary rules are implemented, how likely are they to stick? Broadening the perspective in these ways frames the issue as a matching problem. When it is recognized both that countries differ in the nature of their institutional endowments, and that there is an array of possible formal arrangements that can be adopted to govern monetary policy, the question then becomes how best to align the formal arrangements with the endowment in which they will be embedded. Case studies of diverse monetary policy-making institutions in Côte d'Ivoire, Argentina, Thailand and New Zealand are used to motivate and illustrate the analysis.