When does policy reform work? The case of central bank independence

Daron Acemoglu, Simon Johnson, Pablo Querubín, James A. Robinson

    Research output: Contribution to journalArticle

    Abstract

    Questions of the effectiveness of economic policy reform are inseparable from the political economy factors responsible for distortionary policies in the first place. Distortionary policies are more likely to be adopted where politicians face fewer constraints. Hence reform should have modest effects in societies where the political system already imposes strong constraints, and in societies with weak constraints, because it does not alter the underlying political economy. Reform should be most effective in societies with intermediate constraints. Furthermore, effective reform in one dimension may lead to deterioration in others, as politicians address the underlying demands through other means - a phenomenon we call the seesaw effect. We report evidence that central bank reforms reduced inflation in countries with intermediate constraints but had no or little effect where constraints were strong or weak. We also present evidence consistent with the seesaw effect: in countries where central bank reform reduces inflation, government expenditure tends to increase.

    Original languageEnglish (US)
    Pages (from-to)351-417
    Number of pages67
    JournalBrookings Papers on Economic Activity
    Issue numberSPRING
    StatePublished - Mar 2008

    ASJC Scopus subject areas

    • Business, Management and Accounting(all)
    • Economics and Econometrics

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  • Cite this

    Acemoglu, D., Johnson, S., Querubín, P., & Robinson, J. A. (2008). When does policy reform work? The case of central bank independence. Brookings Papers on Economic Activity, (SPRING), 351-417.