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 language||English (US)|
|Number of pages||67|
|Journal||Brookings Papers on Economic Activity|
|State||Published - Mar 2008|
ASJC Scopus subject areas
- Business, Management and Accounting(all)
- Economics and Econometrics