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Federalism and Central bank Independence: The Politics of German Monetary Policy, 1957–92

Published online by Cambridge University Press:  13 June 2011

Susanne Lohmann
Susanne Lohmann
Affiliation:
University of California
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Abstract

Two channels of political control allow elected politicians to influence monetary policy. First, political threats to the status, structure, or very existence of the central bank may force central bankers to comply with politically motivated demands on monetary policy. Second, politicians may use their powers of appointment to ensure diat central bank appointees share their electoral and party-political goals. This paper derives the monetary policy outcomes obtained as a function of me degree of central bank independence (zero, partial, or full) and central bankers' types (partisans or technocrats).

Based on a case study of the 1957 and 1992 institutional changes to the German central banking system and a regression analysis covering the period in between, the author argues that the formal independence of the system is protected by its embeddedness in the institutions of German federalism and by the federalist components of its decentralized organizational structure. The behavioral independence of the German central bank fluctuates over time with the party control of federalist veto points. The Bundesbank is staffed with nonpartisan technocrats who are partially insulated from political pressures.

Type
Research Article
Information
World Politics , Volume 50 , Issue 3 , April 1998 , pp. 401 - 446
Copyright
Copyright © Trustees of Princeton University 1998

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30 Here I Mo w Lang and Welzel (fn. 6).

31 I use 115 observations and not the 120 that might be expected for quarterly data covering the time period 1960–89. This is because of the loss of the first five observations that occurs when lagged fourth-quarter-to-fourth-quarter growth rates are formed.

32 Consider the model yt = α + βyt-1 + εt, where y is the dependent variable, α is a constant, β is the coefficient on the lagged dependent variable, and ε is a spherical disturbance. The bias of the OLS estimator of β, βOLS, is given by , where T is the number of observations. Note that the bias becomes small as T becomes large. (Moreover, the presence of additional regressors in the model decreases the bias.) One possible correction for the bias is to use the estimator see Peter Kennedy, A Guide to Econometrics, 2d ed. (Cambridge: MIT Press, 1985), 122. The regression results summarized in Tables 6 and 7 show that my qualitative conclusions are unaffected by the bias, noting that T equals 115.

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