nep-pol New Economics Papers
on Positive Political Economics
Issue of 2015‒01‒09
twenty-two papers chosen by
Eugene Beaulieu
University of Calgary

  1. Is There Gender Bias Among Voters ?Evidence from the Chilean Congressional Elections By Francisco Pino
  2. Electoral effects on the composition of public spending and revenue: evidence from a large panel of countries By Atsuyoshi Morozumi; Francisco José Veiga; Linda Gonçalves Veiga
  3. Measuring the extent and implications of corporate political connections in prewar Japan By Tetsuji Okazaki; Michiru Sawada
  4. Do Criminally Accused Politicians Affect Economic Outcomes? Evidence from India By Nishith Prakash; Marc Rockmore; Yogesh Uppal
  5. Overlapping political budget cycles in the legislative and the executive By Foremny, Dirk; Freier, Ronny; Moessinger, Marc-Daniel; Yeter, Mustafa
  6. PОLITICAL МАRKETING – NЕGATIV CAMPAING By Ljubisa Stojmirović , Aleksandra Stojković , Tomislav Nikolić
  7. Do political factors matter for regional development? Evidence on the central-local partisan alignment in Turkey during AKP ruling By Davide Luca
  8. Voting and Peer Effects: Experimental Evidence from Mozambique By Marcel Fafchamps; Ana Vaz; Pedro C. Vicente
  9. The Perverse Consequences of Policy Restrictions in the Presence of Asymmetric Information By Rafael Hortala-Vallve; Valentino Larcinese; Stephanie Rickard
  10. Media Power By Prat, Andrea
  11. Foreign vs. domestic public debt and the composition of government expenditure: A political-economy approach By Philipp Harms; Joachim Lutz
  12. Cultural Differences and Institutional Integration By Luigi Guiso; Helios Herrera; Massimo Morelli
  13. Demographic Transition and Rise of Modern Representative Democracy By Namasaka, Martin
  14. The political economy of economic growth in India, 1993-2013 By Kunal Sen; Sabyasachi Kar; Jagadish Prasad Sahu
  15. The Politics of Related Lending By Michael Halling; Pegaret Pichler; Alex Stomper;
  16. Trade and civil conflict : revisiting the cross-country evidence By Cali, Massimiliano; Mulabdic, Alen
  17. The demand side of clientelism: The role of client's perceptions and values By Miquel Pellicer; Eva Wegner; Lindsay Benstead; Harold Kincaid; Ellen Lust; Juanita Vasquez
  18. Monetary disunion: The domestic politics of Euroland By Streeck, Wolfgang; Elsässer, Lea
  19. Estimating the Preferences of Central Bankers : An Analysis of Four Voting Records By Eijffinger, S.C.W.; Mahieu, R.J.; Raes, L.B.D.
  20. Women and Corruption: What Positions Must They Hold to Make a Difference? By Chandan Kumar Jha; Sudipta Sarangi
  21. The Effects of Experience on Preferences: Theory and Empirics for Environmental Public Goods By Mikolaj Czajkowski; Nick Hanley; Jacob LaRiviere
  22. Central Banks: Powerful, Political and Unaccountable? By Buiter, Willem H.

  1. By: Francisco Pino
    Abstract: I exploit the unique institution of gender-segregated voting booths in Chile, allowingthe use of actual voting data, instead of self-reported surveys, to test for genderbias among voters. Overall I find evidence of a small but significant negative genderbias: women overall are less likely than men to vote for female candidates. The effect ismainly driven by center-right voters. Selection, candidates’ quality and districts’ characteristicsdo not explain away the results. This evidence does not question whetherfemale leaders have an effect on economic outcomes, but rather the mechanism throughwhich this effect takes place.
    Keywords: gender; voting; electoral system; discrimination; political economy
    JEL: D72 J16 O54
    Date: 2014–12
  2. By: Atsuyoshi Morozumi (University of Nottingham, CFCM); Francisco José Veiga (Universidade do Minho - NIPE); Linda Gonçalves Veiga (Universidade do Minho - NIPE)
    Abstract: This paper examines the effects of elections on central governments’ fiscal policy conducts. We construct a unique database of disaggregated spending and revenue series at the central government level, for a panel of up to 107 countries over the 1975-2010 period. Using this data, we show that under some specific political environments, incumbents generate political budget cycles, predominantly by increasing current, rather than capital, spending and reducing taxes, most often income taxes. However, when democracies are matured, in election years, central governments reallocate their expenditure and revenue components, without changing their total levels. Specifically, they reallocate spending from capital spending to grants to other government units, while reducing income taxes and increasing consumption taxes instead.
    Keywords: Political budget cycles; Spending and revenue composition; Central government; Opportunism
    JEL: E6 D7 H5
    Date: 2014
  3. By: Tetsuji Okazaki; Michiru Sawada
    Abstract: This paper investigates the extent, determinants, and implications of the political connections of firms at the peak of democracy in prewar Japan, identifying a firm as politically connected if one of its directors was simultaneously a member of the House of Representatives. We analyze the data of publicly traded companies in the periods before and after the 1928 and 1930 general elections. It is found that almost 20 % of publicly traded companies had political connections through politician directors. Regressions analyses reveal that smaller or badly performing firms and firms in the electric utilities and railroad industries, where government licenses were important, were more likely to have political connections. Furthermore, we find that the stock returns of firms that had new political connections improved from the pre-election period to the post-election period.
    Date: 2014–11
  4. By: Nishith Prakash (University of Connecticut); Marc Rockmore (Clark University); Yogesh Uppal (Youngstown State University)
    Abstract: The recent increase in the number of criminally accused politicians elected to state assemblies has caused much furor in India. Despite the potentially important consequences and the widely divergent views, the implications of their elections to state legislative assemblies on constituency-level economic performance are unknown. Using a regression discontinuity design and data on the intensity of night lights in satellite imagery at the constituency level, our results suggest that the cost of electing criminally accused politicians on measures of economic activity is quite large. Using estimates of the elasticity of GDP to light, we find that the election of criminally accused candidates lead to roughly 5 percent lower GDP growth per year on average. These estimated costs increase for candidates with serious accusations, multiple accusations, and accusations regarding financial crimes. Our result survives variety of robustness checks.
    Keywords: Growth, Indian Politicians, Information disclosure, Regression Discontinuity, India
    JEL: D72 D73 O40 O12
    Date: 2014–11
  5. By: Foremny, Dirk; Freier, Ronny; Moessinger, Marc-Daniel; Yeter, Mustafa
    Abstract: We advance the literature on political budget cycles by testing separately for cycles in expenditures for elections in the legislative and the executive. Using municipal data, we can separately identify these cycles and account for general year effects. For the executive branch, we show that it is important whether the incumbent re-runs. To account for the potential endogeneity associated with this decision, we apply a unique instrumental variables approach based on age and pension eligibility rules. We find sizable and significant effects in expenditures before council elections and before joint elections when the incumbent re-runs.
    Keywords: election cycles,municipal expenditures,council and mayor elections,instrumental variables approach
    JEL: H11 H71 H72 H74
    Date: 2014
  6. By: Ljubisa Stojmirović , Aleksandra Stojković , Tomislav Nikolić (Belgrade Business School)
    Abstract: It is common for political parties and certain individuals that during the election campaign they try to use a negative campaign in order to achieve a certain advantage over their rivals. What are the effects of such campaigns, whether they are successful or even counter-productive. The authors of these paper present specified case in order to show the result of such a campaign.
    Keywords: campaigns, political marketing, parties, the media, voters...
    JEL: D72 L82 M31
    Date: 2014–04
  7. By: Davide Luca
    Abstract: The importance of political local coalitions in shaping local governance structures conducive to economic growth has been a subject of research for numerous years, both in rich economies as well as in emerging countries. In spite of such amount of research, little attention has yet been paid to the political relations between the central state and the local coalitions, as well as the role of political conflicts between such levels, in hampering local and regional economic performance. Very recently scholars have argued that in countries where political factors may play a strong role in providing privileged treatment to people and constituencies with the right political affiliation, tense central/local relationships may inhibit local governance structures in promoting growth. The channels through which such impact may generate include providing particular incentives to neighboring aligned regions so as to stimulate investments' relocations, unfavorable treatment of nonaligned businesspeople via legislative and administrative mechanisms, and reducing the amount of public investments necessary for development. The current paper will exactly try to test such prediction by exploring whether tense central-local political relationships ? which will be proxied by the level to which local constituencies are politically unaligned with the government ? determined slower regional economic growth. To this aim the paper will define a model of political economic growth accounting for standard socio-economic determinants of regional economic growth, as well as political alignment variables, and test it to the 81 provinces of Turkey during the period 2004-2011. Turkey provides an interesting setting to test the research puzzle because of the highly heterogeneous regional economic trends recorded in recent years, as well as the increasing political polarization that has occurred between the opposition political parties and the government led by the Adalet ve Kalkinma Partisi (Justice and Welfare Party, AKP) since 2002. Preliminary results do indeed seem to suggest that after controlling for socio-economic factors, and for time-invariant province-specific unobservable characteristics, areas politically unaligned with the central government grew slower over the period 2004-2011. At the same time, however, the magnitude of such political impacts on regional economic performance is significantly smaller than the one of regional socio-economic factors, suggesting that politics is not a key determinant behind regional growth trends.
    Keywords: political economy of development; partisan alignment; economic growth; Turkey
    JEL: H70 R11
    Date: 2014–11
  8. By: Marcel Fafchamps; Ana Vaz; Pedro C. Vicente
    Abstract: Voter education campaigns often aim to increase voter particpation and political accountability. We follow randomized interventions implemented nationwide during the 2009 Mozambican elections using a free newspaper, leaflets, and text messaging. We investigate whether treatment effects were transmitted through social networks (kinship and chatting) and geographical proximity. For individuals personally targeted by the campaign, we estimate the reinforcement effect of proximity to other targeted individuals. For untargeted individuals, we estimate the diffusion of the campaign depending on a proximity to targeted individuals. We find evidence for both effects, similar across the different treatments and across the different connectedness measures. We observe that the treatments worked through the networks by raising the levels of information and interest about the election, in line with the average treatment effects of voter education on voter participation. We interpret this result as a free riding effect, likely to occur for costly actions. JEL codes:
    Date: 2013
  9. By: Rafael Hortala-Vallve; Valentino Larcinese; Stephanie Rickard
    Abstract: Institutions can limit governments' policy options. Such restrictions are usually commended as solutions to time inconsistency problems or coordination failures. However, policy constraints can have important drawbacks and these disadvantages have generally been overlooked to date. When institutional constraints tie the governments' hands, citizens have fewer incentives to be informed about politics and participate in collective decision making. In effect, policy restrictions lower the private returns from political information. A fiscal policy restriction, for example, may decrease redistribution by lowering poorer voters' acquisition of political information. We find support for our prediction in a controlled laboratory experiment.
    Date: 2013–12
  10. By: Prat, Andrea
    Abstract: How much influence can news providers exert on the political process? This paper defines the power of a media organization as its ability to induce voters to make electoral decisions they would not make if reporting were unbiased. While existing media concentration measures are built by aggregating market shares across platforms, the new measure performs cross-platform aggregation at the level of individual voters on the basis of their attention shares. The paper derives a robust upper bound to media power over a range of assumptions on the beliefs and attention patterns of voters. Computing the value of the index for all major news sources in the United States from 2000 to 2012 results in four findings. First, it cannot be excluded that the three largest media conglomerates could individually swing the outcome of most presidential elections. Second, in all specifications the most powerful media organizations are broadcasters: the press and new media are always below. Third, relative media power is well approximated by a simple function of attention shares. Fourth, a calibrated version of the model indicates that media power is much lower than the upper bound but still substantial
    Keywords: media concentration; media plurality
    JEL: L82
    Date: 2014–08
  11. By: Philipp Harms (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany); Joachim Lutz (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany)
    Abstract: We consider an economy in which a political-support maximizing government takes into account different generations' preferences when deciding how much to borrow abroad and how much to spend on public consumption and investment. We show that, in equilibrium, the government's choices are shaped by three parameters: the effect of government spending on output, the expected output costs of a default, and the relative political weight of the generations currently alive. We conclude that the joint dependence on these parameters establishes a strong, but non-linear relationship between the share of foreign debt in total public debt and the share of investment in total government spending.
    Date: 2014–11–20
  12. By: Luigi Guiso; Helios Herrera; Massimo Morelli
    Abstract: If citizens of different countries belonging to an economic union adhere to different and deeply rooted cultural norms, when these countries interact their leaders may find it impossible to agree on efficient policies, especially in hard times. Political leaders’ actions are bound to express policies that do not violate these norms. This paper provides a simple positive theory and a compelling case study of the importance of cultural clashes when economies integrate, as well as a normative argument about the desirability of institutional integration. Namely, we argue that a political union, with a common institutions and enforcement of rules, is a solution which is most beneficial the greater is cultural diversity in an economic union. JEL Classification: D72 Keywords: Cultural Norms, Institutions, Crisis Mismanagement.
    Date: 2014
  13. By: Namasaka, Martin
    Abstract: By focusing solely on the institutional reforms and changes in the political leadership that precede political liberalisation, studies on the determinants of democracy have often overlooked the influence of demographic factors such as population age structure as a catalyst for and reflection of a host of changes in societies that can affect governance and stability of liberal democracy. It is not surprising, noting the recent revolutions such as the Arab spring and the Egyptian Uprising , that numerous research now tends to spotlight the so called youth bulge and how they tend to either support authoritarian regimes or sustain liberal democracies as a result of youth-led democracy movements as witnessed in Costa Rica, India, Jamaica and South Africa (Cincotta, R. (2008/09).
    Keywords: Demographic Transition, Democracy, Population Growth in Sub-Saharan Africa, Perspectives on the Demographic Transition, Youth Bulge, Second and Third Demographic Transition, China and India, Demographic Transition and Economic Growth and Demographic Responses, Fertility Decline and the Demographic Transition, Population and Development, Population and National Security, Demographic Transition and Changing Sex Roles
    JEL: J1 J11 J13 O1 O40 O47
    Date: 2014–11–22
  14. By: Kunal Sen; Sabyasachi Kar; Jagadish Prasad Sahu
    Abstract: We examine the political economy causes of India's growth acceleration in the early 1990s, the periods of high growth in the 1990s and early 2000s, and the subsequent slowdown since 2011, drawing from the ESID conceptual framework (Pritchett and Werker 2013) and periodisation of growth episodes (Kar et al. 2013a). We argue that India's post-reform growth experience can be separated into three distinct growth episodes. The first growth episode, from 1993 to 2002, was characterised by a set of predictable informal (and relatively open) relationships (which we call 'ordered deals') between political and economic elites. The second episode was from 2002 to 2010; deals in this period became increasingly closed, leading to negative feedback effects from accountability institutions, the middle class and non-elites, along with structural retrogression of the economy. The third episode, beginning in 2011, was one of an incipient growth deceleration, and was characterised by increasingly disordered deals. Our analysis of the Indian growth experience provides support for the conceptual framework we have used here and our other ESID growth studies. The wider implication of our analysis is that economic growth in most developing country contexts remains episodic and prone to collapse, as institutions do not evolve over the growth process, and in many instances, deteriorate.
    Date: 2014
  15. By: Michael Halling; Pegaret Pichler; Alex Stomper;
    Abstract: We analyze the profitability of government-owned banks’ lending to their owners, using a unique data set of relatively homogeneous government-owned banks; the banks are all owned by similarly structured local governments in a single country. Making use of a natural experiment that altered the regulatory and competitive environment, we find evidence that such lending was used to transfer revenues from the banks to the governments. Some of the evidence is particularly pronounced in localities where the incumbent politicians face significant competition for reelection.
    Keywords: politics and finance, bank regulation, related lending
    JEL: G21 G38 L32
    Date: 2014–11
  16. By: Cali, Massimiliano; Mulabdic, Alen
    Abstract: This paper revisits and expands the evidence on the impact of trade shocks on intra-state conflict with a large sample of developing countries in the 1960-2010 period. The results suggest that increases in the prices of a country's exported commodities raise the country's risk of civil conflict and its duration. The effect on conflict risk is mainly driven by the price of point-source commodities, in line with the rapacity effect theory of conflict. However, the paper does not find support for the opportunity cost theory via exported commodities. The analysis also finds that intense trading with contiguous countries is associated with lower duration of intra-state conflict, consistent with the idea that such trade reduces the incentive of contiguous countries to fuel conflict in their neighbor. Trading with neighbors is also associated with a lower risk of conflict, when such trade occurs under trade agreements. By contrast, neither imported commodity prices nor the economic cycle in export markets appears to exert any influence on the probability or duration of conflict. The paper identifies several conditions under which changes in the value of exported commodities cease to matter for conflict probability.
    Keywords: Emerging Markets,Post Conflict Reconstruction,Economic Theory&Research,E-Business,Social Conflict and Violence
    Date: 2014–11–01
  17. By: Miquel Pellicer (GIGA Hamburg, and SALDRU, University of Cape Town); Eva Wegner (GIGA Hamburg, and SALDRU, University of Cape Town); Lindsay Benstead (Hatfield School of Government, Portland State University); Harold Kincaid (School of Economics, RUBEN, University of Cape Town); Ellen Lust (Department of Political Science, Yale University); Juanita Vasquez (Department of Economics, University of Gottingen)
    Abstract: Political science literature on clientelism has tended to focus primarily on the role of parties and brokers, leaving the demand side of clientelism - the choices of potential clients - relatively unexplored. This paper proposes a formal framework sheding light on the demand side of clientelism. We conceptualize clientelistic choice as one between engaging in clientelism, on the one hand, and supporting a redistributive platform, on the other. This approach allows us to draw insights from the social psychology literature on mobilization and the economics literature on redistribution preferences. Our framework nests the standard model of clientelistic choice, with factors such as poverty and ideological stance, but also includes other factors such as perceptions of political efficacy and values regarding the legitimacy of existing inequalities. We start with a simple static model that allows us to study the role of these factors in a simple, unified way. Our framework is well suited to address issues relatively unexplored in the literature, including the role of clients in the persistence of clientelism and the reasons clientelism persists or is eliminated. Most importantly, we address how clientelism gets transformed from a "traditional" type of clientelism, embedded in legitimized social relations, to a "modern" type, such as vote buying. To address these issues, we study a dynamic extension of the model where efficacy and legitimacy perceptions are endogenized and the degree of informational connectivity in the community is incorporated. In our model, efficacy and legitimation perceptions reinforce each other because efficacy perceptions lead people to expect high and sustained inequality which is then legitimized in order to protect self-esteem. This generates multiple steady states, one of which resembles a "traditional" form of clientelism that features widespread clientelism and disempowered clients that legitimize social inequalities. Informational connectivity breaks this reinforcement mechanism and thus leads to a unique steady state where clientelism and programmatic redistribution co-exist, and that resembles a "modern" type of clientelism.
    Keywords: Clientelism, Demand side, Mobilization
    Date: 2014
  18. By: Streeck, Wolfgang; Elsässer, Lea
    Abstract: Regional disparities within the European Union have always been perceived as an impediment to monetary integration. This is why discussions on a joint currency, from their very beginning, were linked to compensatory payments in the form of regional policy payments. Structural assistance to poor regions and member states increased sharply at the end of the 1980s. Today, however, fiscal support has to be shared with the new member states in the East. Moreover, due to the financial crisis, the cheap credit that poor EMU member countries enjoyed as a result of interest rate convergence is no longer available. We predict that in the future, some sort of financial aid will have to be provided by rich member countries to poor ones, if only to prevent a further increase in economic disparities and related political instability. We also expect long-lasting distributional conflict between payer and recipient countries far beyond current rescue packages, together with disagreement on the extent of aid required and the political control to be conceded by receiving countries to giving countries. We illustrate the dimension of the distributional conflict by comparing income gaps and relative population size between the center and the periphery of Europe on the one hand and on the other, between rich and poor regions in two European nation-states characterized by large regional disparities, Germany and Italy. While income gaps and population structures are similar in the two countries to those between Northern Europe and the Mediterranean periphery, regional redistribution is much more extensive in the two nation-states. We conclude that this presages a difficult future for the domestic politics of Euroland.
    Abstract: Regionale Disparitäten in der Europäischen Union galten immer als Hindernis für den währungspolitischen Integrationsprozess. Aus diesem Grund waren die Verhandlungen über eine zukünftige Währungsunion von Anfang an mit Forderungen nach Ausgleichszahlungen in Form von regionalpolitischen Hilfsprogrammen verknüpft. Strukturhilfen an arme Regionen und Mitgliedsstaaten wurden Ende der 1980er-Jahre erhöht. Heute müssen die entsprechenden Mittel allerdings mit den neuen Mitgliedsstaaten im Osten geteilt werden. Zudem können die ärmeren EWU-Mitglieder seit der Finanzkrise keine günstigen Kredite mehr aufnehmen. Wir gehen davon aus, dass es auch in Zukunft finanzielle Transfers von den reichen zu den armen Mitgliedsstaaten wird geben müssen, selbst wenn sie nur dazu dienen, stärkere wirtschaftliche Disparitäten und damit einhergehende politische Instabilität zu verhindern. Zudem können über die gegenwärtigen Rettungsmaßnahmen hinaus lang anhaltende zwischenstaatliche Verteilungskonflikte zwischen Geber- und Empfängerländern erwartet werden, in welchen es vor allem um den Umfang der Finanzhilfen und die im Gegenzug verlangte Abgabe politischer Kontrolle durch die Empfänger von Transfers gehen wird. Um die Dimension des Verteilungskonflikts zu veranschaulichen, vergleicht der Aufsatz Einkommenslücken und relative Bevölkerungsgrößen zwischen Peripherie und Zentrum der EU mit denen zwischen armen und reichen Regionen zweier Nationalstaaten mit starken regionalen Disparitäten, Italien und Deutschland. Während Einkommenslücken und Bevölkerungsstruktur in den beiden Nationalstaaten denen innerhalb der EWU ähneln, ist die regionale Umverteilung in den Nationalstaaten weitaus höher. Wir schließen daraus, dass die Innenpolitik der Eurozone konfliktreich sein wird.
    Date: 2014
  19. By: Eijffinger, S.C.W. (Tilburg University, Center For Economic Research); Mahieu, R.J. (Tilburg University, Center For Economic Research); Raes, L.B.D. (Tilburg University, Center For Economic Research)
    Abstract: Abstract: This paper analyzes the voting records of four central banks (Sweden, Hungary, Poland and the Czech Republic) with spatial models of voting. We infer the policy preferences of the monetary policy committee members and use these to analyze the evolution in preferences over time and the differences in preferences between member types and the position of the Governor in different monetary policy committees.
    Keywords: Ideal points; Voting records; Central Banking; NBP; CNB; MNB; Riksbank
    JEL: E58 E59 C11
    Date: 2013
  20. By: Chandan Kumar Jha; Sudipta Sarangi
    Abstract: This paper examines the precise role: whether it is the bribe-taking role, the decision-making or policy making role, in which womenâs presence can have an impact on corruption. It is the first paper in the gender and corruption literature to use an IV approach for addressing endogeneity concerns. We provide robust evidence that womenâs presence in parliament has a causal and negative impact on corruption, while other measures of female participation in economic activities are shown to have no effect. We draw inferences based on Moreiraâs (2003) conditional likelihood ratio approach. We also briefly examine the potential channels through which women as parliamentarians can affect corruption, and whether women are likely to become as corrupt as men as they gain similarity in social status.
    JEL: D73 J16 K42
    Date: 2014–11–18
  21. By: Mikolaj Czajkowski (Faculty of Economic Sciences, University of Warsaw, Poland); Nick Hanley (School of Geography and Sustainable Development, University of St. Andrews); Jacob LaRiviere (Department of Economics, University of Tennessee)
    Abstract: This paper develops a choice model for environmental public goods which allows for consumers to learn about their preferences through consumption experiences. We develop a theoretical model of Bayesian updating, perform comparative statics over the model, and show how the theoretical model can be consistently incorporated into a reduced form econometric model. Our main findings are that in a Random Utility Model (RUM) discrete choice model, a subject’s scale should increase and the variability of scale should decrease with experience if subjects are Bayesians. We then estimate the model using field data regarding preferences for one particular public good, water quality. We find strong evidence that additional experience increases scale, thereby makes consumer preferences more predictable from the econometrician’s perspective. We find supportive but less convincing evidence that experience decreases the variability of scale across subjects.
    Keywords: Bayesian updating,choice experiment,learning,scale, scale variance
    JEL: C51 D83 Q51 H43
    Date: 2014–09
  22. By: Buiter, Willem H.
    Abstract: Central banks’ economic and political importance has grown in advanced economies since the start of the Great Financial Crisis in 2007. An unwillingness or inability of governments to use countercyclical fiscal policy has made monetary policy the only stabilization tool in town. However, much of the enhanced significance of central banks is due to their lender-of-last-resort and market-maker-of-last-resort roles, providing liquidity to financially distressed and illiquid financial institutions and sovereigns. Supervisory and regulatory functions – often deeply political, have been heaped on central banks. Central bankers also increasingly throw their weight around in the public discussion of and even the design and implementation of fiscal policy and structural reforms - areas which are way beyond their mandates and competence. In this lecture I argue that the preservation of the central bank’s legitimacy requires that a clear line be drawn between the central bank’s provision of liquidity and the Treasury’s solvency support for systemically important financial institutions. All activities of the central bank that expose it to material credit risk should be guaranteed by the Treasury. In addition, central banks must become more accountable by increasing the transparency of their lender-of-last-resort and marketmaker-of-last resort activities. Central banks ought not to engage in quasi-fiscal activities. Finally, central banks should stick to their knitting and central bankers should not become participants in public debates and deeply political arguments about matters beyond their mandate and competence, including fiscal policy and structural reform.
    Keywords: accountability; independence,; legitimacy; monetary policy; quasi-fiscal; regulation; seigniorage,; supervision
    JEL: E02 E42 E52 E58 E61 E62 E63 G18 G28 H63
    Date: 2014–10

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