Abstract
We examine whether sectional interest groups influence monetary policy goals in a manner consistent with their interests as distributive coalitions. In particular, we explore whether bank groups and labor groups are associated with the incidence of inflation targeting by the central bank. Controlling for a variety of economic and institutional factors, our main findings reveal that bank groups are associated with a higher probability that a country is an inflation-targeter while labor groups are associated with a lower probability. The findings are conditional on the level of democracy and on aspects of central bank independence.
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Notes
A short-run tradeoff between inflation and unemployment is inconsistent with divine coincidence—equivalency between stabilizing inflation and stabilizing the welfare-relevant output gap. However, in theory, several reasons can be found for being skeptical of such a coincidence, including real wage rigidities or information problems. Moreover, a key feature of the forecasting toolkit of economists and central (and other) bankers alike is its absence (e.g., Morett et al., 2019; Belinga and Doukali 2019).
For categorical variables, the marginal effect indicates how the probability that a country is an inflation-targeter changes as the categorical variable changes from 0 to 1. For continuous variables, such as Bank Groups and Labor Groups, the marginal effect yields an instantaneous rate of change. It is common to imagine that marginal effects in probability models must range between 0 and 1. However, that is not the case here. The marginal effect is the slope of the prediction function, which can be greater than one even if the values of the function are between 0 and 1.
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Acknowledgements
We thank Ismail Cole for an especially careful discussant report as well as Sandeep Mazumder and participants in the meetings of the Eastern Economic Association and the Public Choice Society for helpful remarks. We also thank three anonymous reviewers for thoughtful reports.
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Appendix
Appendix
1.1 Country list (year of adoption/cessation in parentheses for inflation targeters)
Albania | El Salvador | Luxembourg | Singapore |
|---|---|---|---|
Algeria | Eq. Guinea | Macedonia | Slovakia (2005) |
Argentina | Estonia | Madagascar | Slovenia |
Armenia (2006) | Ethiopia | Malawi | Solomon Islands |
Australia (1993) | Fiji | Malaysia | South Africa (2000) |
Austria | Finland (1993/1998) | Maldives | South Korea (1998) |
Bahamas | France | Mali | Spain (1995/1998) |
Bahrain | Gabon | Malta | Sri Lanka |
Bangladesh | Gambia | Mauritania | St. Kitts and Nevis |
Barbados | Georgia | Mauritius | St. Vincent and the Grenadines |
Belarus | Germany | Mexico (2001) | Sudan |
Belgium | Ghana (2007) | Moldova | Suriname |
Belize | Greece | Mongolia | Sweden (1993) |
Benin | Grenada | Morocco | Switzerland (2000) |
Bolivia | Guatemala (2005) | Mozambique | Syria |
Bosnia-Herz | Guinea | Namibia | Tajikistan |
Botswana | Guinea-Bissau | Nepal | Tanzania |
Brazil (1999) | Guyana | Netherlands | Thailand (2000) |
Bulgaria | Haiti | New Zealand (1990) | Togo |
Burkina Faso | Honduras | Nicaragua | Tonga |
Burundi | Hungary (2001) | Niger | Trinidad and Tobago |
Cambodia | Iceland (2001) | Nigeria | Tunisia |
Cameroon | India | Norway (2001) | Turkey (2006) |
Canada (1991) | Indonesia (2005) | Oman | Turkmenistan |
Cape Verde | Iran | Pakistan | Uganda |
CAR | Iraq | Panama | Ukraine |
Chad | Ireland | Papua New Guinea | United Arab Emirates |
Chile (1991) | Israel (1992) | Paraguay | United Kingdom (1993) |
China | Italy | Peru (2002) | United States |
Colombia (2000) | Ivory Coast | Philippines (2002) | Uruguay |
Comoros | Jamaica | Poland (1999) | Uzbekistan |
Congo, Dem. Rep | Japan | Portugal | Vanuatu |
Congo, Rep | Jordan | Qatar | Venezuela |
Costa Rica | Kazakhstan | Romania (2005) | Vietnam |
Croatia | Kenya | Russia | Yemen |
Cuba | Kuwait | Rwanda | Zambia |
Cyprus | Kyrgyzstan | Saint Lucia | Zimbabwe |
Czech Republic (1998) | Laos | Samoa | |
Denmark | Latvia | San Marino | |
Djibouti | Lebanon | Saudi Arabia | |
Dominica | Lesotho | Senegal | |
Dominican Rep | Liberia | Serbia | |
Ecuador | Libya | Seychelles | |
Egypt | Lithuania | Sierra Leone |
1.2 Variable definitions and data sources
The dataset is an unbalanced panel of a maximum 2648 annual observations that covers 154 nations over the period 1985–2008.
1.3 Dependent variable
Inflation Targeter: A dummy variable that takes the value one for inflation targeters, and zero otherwise. Inflation targeters are nations with a publicly announced numerical target for inflation. The main analysis uses the official adoption dates according to the central bank. Two alternative dates are considered in the sensitivity analysis: (1) soft inflation targeting (SIT) adoption and (2) full-fledged inflation targeting (FFIT) adoption. SIT is characterized by coexistence of an inflation target and other nominal anchors such as exchange rate pegs. FFIT entails an inflation target as the single nominal anchor. Source: Samarina and De Haan (2014), Table 1.
1.4 Independent variables
Bank Groups: The number of banking sector interest groups in a country as a share of real GDP per capita. Counts as of 1985, 1995, 1999, and 2002 are used, respectively, for the periods 1985—1994, 1995—1998, 1999—2001, 2002—2008. Source: Third through sixth editions of World Guide to Trade Associations.
Labor Groups: The number of labor interest groups in a country as a share of real GDP per capita. Counts as of 1985, 1995, 1999, and 2002 are used, respectively, for the periods 1985—1994, 1995—1998, 1999—2001, 2002—2008. Source: Third through sixth editions of World Guide to Trade Associations.
CBI—CEO: A component of central bank independence related to “the appointment, dismissal, and term of office of the chief executive officer of the bank…” (Cukierman et al. 1992). Source: Garriga (2016).
CBI—Policy: A component of central bank independence related to “the policy formulation cluster, which concerns the resolution of conflicts between the executive branch and the central bank over monetary policy and the participation of the central bank in the budget process.” (Cukierman et al. 1992). Source: Garriga (2016).
CBI—Objective: A component of central bank independence related to “the objectives of the central bank.” (Cukierman et al. 1992). Source: Garriga (2016).
CBI—Lending Limits: A component of central bank independence related to “limitations on the ability of the central bank to lend to the public sector…” (Cukierman et al. 1992). Source: Garriga (2016).
Central Bank Independence: A measure of central bank independence. Source: Garriga (2016). We use Garriga's weighted measure, which is based on the Cukierman et al. (1992) coding and weighting rules.
Political Polarization: A measure of polarization in government. Source: World Bank Database of Political Institutions, “polariz.”
Checks and Balances: A measure of checks and balances in government. Source: World Bank Database of Political Institutions, “checks.”
Democracy: A measure of political rights. Source: Freedom House political rights index (reversed so that 1 = least democratic and 7 = most democratic).
Exchange Rate Regime: A categorical variable that takes the values one, two, three, or four, for least flexible to most flexible exchange rate regime. Source: Ilzetzki, Reinhart, and Rogoff (2017), “coarse” classification code.
Government Debt: Central government debt as a share of GDP. Source: International Monetary Fund Historical Public Debt Database. and Jaimovich and Panizza (2010).
Openness: Sum of exports and imports as a share of GDP. Source: World Bank World Development Indicators.
Private Credit: Private credit provided by deposit money banks and other financial institutions as a share of GDP. Source: World Bank Financial Structure and Development Dataset (July 2018 version).
Capital Account Openness: An index measuring the degree of capital account openness. Source: Chinn and Ito (2006).
Financial Crisis: A dummy variable that takes the value one if a country is experiencing a banking crisis. Source: Laeven and Valencia (2012).
Inflation: CPI inflation rate, transformed as π/100/(1 + π /100). Source: World Bank World Development Indicators.
GDP: Real GDP per capita. Source: World Bank World Development Indicators.
Growth: annual percentage growth rate of real GDP per capita. Source: World Bank World Development Indicators.
Growth Volatility: Three-year rolling standard deviation of Growth.
Exchange Rate Volatility: Annual standard deviation of monthly percentage changes in real effective exchange rates. Source: International Monetary Fund International Financial Statistics and Darvas (2012).
1.5 Variables, findings, and expected signs
Variable | SDH | L | MS | HW | Expected sign |
|---|---|---|---|---|---|
Bank groups | x* | + | |||
Labor groups | x* | - | |||
Central bank independence | x* | x* | x | x | + |
Political polarization | x* | x* | + | ||
Checks and balances | x* | x | x* | + | |
Democracy | X | x* | + | ||
Central government debt | x* | X | x | - | |
Openness | x* | x* | x | x* | - |
Capital account openness | x | x | + | ||
Private credit | x* | x | x* | - | |
Financial crisis | x | x | - | ||
Inflation | x* | x* | x* | x* | - |
GDP per capita | x* | x | x* | + | |
Growth | x | x | ± | ||
Growth volatility | x* | x* | x* | ± | |
Exchange rate volatility | x* | x* | x | ± | |
Exchange rate regime (flexibility) | x* | x* | x* | x* | + |
Political fractionalization | x* | + | |||
Financial structure | x* | + | |||
Deposit money bank Assets | x | + | |||
Interest rate | x* | + | |||
Fiscal balance | x | + | |||
Public domestic debt | x* | + | |||
Current account | x | - | |||
External debt | x | - | |||
Liquid liabilities | x | + | |||
Number of inflation targeters | x* | + | |||
Federalism | x* | + | |||
Government stability | x | + | |||
Partisanship (rightist) | x | + | |||
Bank regulation by CB (none) | x* | + | |||
Parliamentary democracy | x | + | |||
Government transparency | x | ± |
The four papers considered are Samarina and de Haan (2014) (SDH), Lucotte (2010) (L), Mukherjeee and Singer (2008) (MS), and this paper (HW). The symbol “x” indicates the variable is included. The symbol “x*” indicates the variable is found to be statistically significant.
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Heckelman, J.C., Wilson, B. Targeting inflation targeting: the influence of interest groups. Public Choice 189, 533–554 (2021). https://doi.org/10.1007/s11127-021-00905-x
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DOI: https://doi.org/10.1007/s11127-021-00905-x