Paper Autonomy, Private Ambition: Theory and Evidence Linking Central Bankers' Careers and

48 Pages·2005·0.55 MB·English

Paper Autonomy, Private Ambition:
Theory and Evidence Linking Central Bankers’
Careers and Economic Performance(cid:3)
Christopher Adolphy
Harvard University
September 13, 2003
Abstract.
Centralbankers’careersareshowntoin(cid:13)uencein(cid:13)ationoutcomes. Ipresent
two theories in which careers explain central bank behavior, develop them
in a game theoretic model, and test them using a comprehensive new data
set of central bankers’ career backgrounds which spans twenty rich democ-
racies and half a century. Career experiences vary considerably over this
sample, and not only mould beliefs about appropriate policy (the social-
ization hypothesis), but also shape career concerns for central bankers who
seek career advancement in either the (cid:12)nancial sector or government (the
career incentives hypothesis). Accordingly, time series cross-section anal-
ysis of in(cid:13)ation shows central bankers with (cid:12)nancial sector backgrounds
presideover lower in(cid:13)ation, while central bankerswithbureaucratic experi-
ence produce higher in(cid:13)ation. The magnitude of career e(cid:11)ects on in(cid:13)ation
is on par with standard measures of central bank independence, and inter-
active models suggest both socialization and incentives contribute to these
career e(cid:11)ects. The study of central banks in particular and bureaucracy
in general should pay greater attention to individual preferences and their
interaction with organizations; institutions alone are not enough.
(cid:3)Prepared for the Annual Meeting of the American Political Science Association, August 28{31, 2003, held in
Philadelphia. An earlier version of this paper was presented at the Comparative Political Economy Workshop,
Cornell University, October 25-26, 2002. I thank Torben Iversen, Peter Hall, Jim Alt, Michael Hiscox, Rob
Fannion,GaryKing,AmandaFriedenberg,KaterinaLinos,JoeFoudy,DanGingerich,andVictorShihforhelpful
suggestions and conversations over the long gestation of this project. I am grateful for the translation assistance
of Christian Brunelli (Japanese) and Dean Hunt (Swedish). I am especially endebted to the Center for Basic
ResearchintheSocialSciencesandtheMultidisciplinaryPrograminInequalityandSocialPolicy,bothofHarvard
University,andthe National Science Foundationfor supporting this research.
yPh.D. Candidate, Department of Goverment. (Littauer Center, North Yard, Harvard University, Cambridge
MA02138; http://chris.adolph.name, [email protected]).
Will it be su(cid:14)cient to mark, with precision, the boundaries
of these departments in the constitution of the government,
and trust to these parchment barriers
against the encroaching spirit of power?
James Madison, Federalist 48
1 Introduction
In di(cid:14)cult economic times, observers wonder whether central banks will stimulate a slowing
economy or maintain a policy to keep in(cid:13)ation in check. In today’s gloomy environment, many
worry that central banks will be \too conservative", paying too much heed to in(cid:13)ation while
global recession and perhaps even de(cid:13)ation loom. This dilemma raises questions not only about
institutions that try to balance independence and accountability, but also about the people
workingwithincentral banksthemselves. Unfortunately, thepoliticaleconomy literatureremains
ill-positioned to address both questions because it usually con(cid:13)ates central bank conservatism
with central bank independence. This confusion of preferences with institutions arises from the
unsupported assumption that independent central bankers are naturally conservative; in other
words, that heavy-handed government meddling is the only source of loose monetary policy.
Rather than ground a large and in(cid:13)uential literature in an untested assumption, we should
disentangle our understanding of monetary preferences and institutions. We need a theory and
measureofcentralbankconservatismtocomplementexistingworkoncentralbankindependence.
To understand central bankers’ monetary policy preferences, we should begin with central
bankers’ career paths and career concerns. A central banker’s career background may in(cid:13)uence
his personal beliefs about the ideal trade-o(cid:11) between in(cid:13)ation and output stability, while at the
same time providing the basis for exchanges of future career favors for policy in(cid:13)uence. Hence a
(cid:12)nancial sector veteran may make a more conservative monetary agent than a former bureaucrat
for two reasons: (cid:12)rst, because ex-bankers are conditioned to care more about in(cid:13)ation vis-a(cid:18)-
vis output; and second, because ex-bankers are more amenable to and suitable for high-level
(cid:12)nancial jobs o(cid:11)ered by (cid:12)nancial sector (cid:12)rms pleased with conservative monetary policy. In
turn, bureacrats may be less enamored with in(cid:13)ation-(cid:12)ghting for its own sake, and more enticed
by tacit promises of high political o(cid:14)ce to provide the government accommodating monetary
policy. In sum, the career trajectories of central bankers before and after the central bank may
hold clues to their monetary policy conservatism while still in it.
Theargumentunfoldsintwo halves. I(cid:12)rstplace thecareerargumentinthecontext ofrecent
research on central banks, developing both the socialization and career incentives mechanisms. I
also illustrate that career concerns can be embedded in the standard game threoretic model of
monetary policy(Rogo(cid:11) 1986), therebyallowing outsideprincipalsleverage over monetary policy
even when the central bank is legally independent. In the second half of the paper, I test the
career backgroundhypothesisusingacomprehensive newdataset ofcentral bankers’career paths
from twenty countries over (cid:12)fty years, showing that central bankers’ career experience explains
signi(cid:12)cant di(cid:11)erences in in(cid:13)ation performance across countries and time.
2
2 Career paths and conservatism in the central bank
Itisintuitivetomostpoliticalscientiststhatweshouldexaminepolicymakers’preferencesinorder
to understand policy outcomes. Yet precisely this question has been overlooked in the study of
central banking. After reviewing the context and consequences of this oversight, I present an
argument for understanding the preferences of o(cid:14)cials through their career backgrounds, which
may a(cid:11)ect both the pre-existing preferences of central bankers and the incentives which face
them.
2.1 Do we really need to study central bank conservatism?
For twenty years, the problem of time inconsistency has dominated the study of monetary pol-
icy, suggesting that elected governments will always be vulnerable to the (arguably ultimately
futile) temptations of expansionary monetary policy, leading to permanently excessive in(cid:13)ation
(Kydland and Prescott 1977, Barro and Gordon 1983). An in(cid:13)uential series of models suggests a
credibly conservative and independent monetary agent can ameliorate this in(cid:13)ationary bias (Ro-
go(cid:11)1986,Lohmann1992). Scholarshavemeasuredandpolicymakershaveimplemenentedcentral
bank independence, but the other half of the formulation|central bank conservatism|has been
ignored in comparative research.
Autonomy is the ability to act on one’s preferences. It tells us nothing about the content of
those preferences. Yet early studies set the precedent of treating CBI as a su(cid:14)cient measure of
both autonomy and conservatism (Grilli, Masciandaro and Tabellini 1991; Alesina and Summers
1993; andCukierman,Webb, andNeyapti 1992), anddozensofpublishedworksthatrelyinsome
way on CBI have followed this example. This modeling choice is an oversimpli(cid:12)cation. It cannot
be justi(cid:12)ed by the explanatory power of CBI taken alone, since even the best CBI measures fail
to explain in(cid:13)ation performance in models with plausible controls (Campillo and Miron 1997)
or in developing countries generally (Cukierman, Webb, and Neyapti 1992). Moreover, no study
(cid:12)nds the expected positive relation between CBI and the variance of unemployment, suggesting
that CBI is an incomplete measure of nonaccommodation. Finally, and unsurprisingly, e(cid:11)orts
to disaggregate CBI into separate measures of independence and conservatism fail to (cid:12)nd any
addede(cid:11)ectofstatutoryinjuctionstopursuepricestability (Berger, deHaan, andEij(cid:14)nger2001
review the evidence). Policy preferences run deeper than unenforceable commands, and only an
approach focused on the agents themselves will uncover the roots of central bankers’ behavior.
Excepting studies of partisan appointment, however, the central bankers themselves have
been ignored.1 Perhaps stereotypes of conservative, (cid:12)nancial-sector-trained central bankers lead
manytoassumethattheseagents, andhencecentralbankconservatismitself,areinvariantacross
time and space. But the stereotype is misleading: central bankers hail from a variety of careers,
of which private (cid:12)nance is not even the most common (see Section 3.2). As I will argue, di(cid:11)ering
backgrounds may even form the basis for a measure of central bank conservatism.
A tendency to accord central bankers with remarkable self-restraint may also contribute to
1Several authors have examined the e(cid:11)ect of partisanship in the appointment of central bankers, particularly
in the US (Chappell, Havrilesky, and MacGregor 1993), but also in Germany (Berger and Woitek 1999). These
studies generally (cid:12)ndthat more conservative parties appoint central bankerswho pursuemore hawkishmonetary
policy.
3
the neglect of their preferences. This faith|implicit in studies of central bank independence
that presume legal declarations of policy objectives will be followed as a matter of course|is
paradoxical for a literature centered on the inability of the government to faithfully execute the
long-term interests of its own principals. As McCallum (1995) notes, constitutional directives to
thecentralbanktopursuelowin(cid:13)ationmayonly\relocate"thetimeinconsistencyproblem,since
thegovernment hasnomore incentive to enforcesuchcommandsthanit hasto resistin(cid:13)ationary
policies in the (cid:12)rst place. Moreover, given an independent central bank with an o(cid:14)cial policy
goal, it is unclear what the government could do to police or clarify the mission of a wayward
central bank, short of the costly step of changing the law itself.2 It is the very nature of agent
independence to give the principal as little power to enforce as to override.
Contrast thismurkydelegation problemwiththehopefulview ofAlan Blinder, aneconomist
and former Vice Chairman of the Fed, that central bankers (and political agents generally) check
their preferences at the door:
It is not necessary to (cid:12)nd a \truly conservative" central banker whose personal value of the
parameter(cid:11)[theamountofoutputthe centralbankeriswillingtosacri(cid:12)cetolowerin(cid:13)ation]
is excessive; you can simply direct the central bank to behave as if (cid:11) were higher. In either
case, central bankersset aside their own personal beliefs about what is best for society ((cid:11) or
k [the ideal in(cid:13)ation rate]) and adopt instead parameter values that lead them to \do their
duty."
Blinder concedes that \Homo economicus may not behave this way. But responsible people, put
in positions of authority, do." (Blinder, 1997, p. 14)
Blinder served on the FOMC, so his views cannot be dismissed out of hand. But from a
principal-agent perspective, Blinder’s claims ring hollow. First, compared with their political
principals, central bankers enjoy faster access to economic data and specialized sta(cid:11) studying
monetary policy questions. Information asymmetry is central to arguments for bureaucratic
dominance of policy, and it is easy to imagine that political principals tasked with dozens of
policyproblemsmaynoteven beaware that agents areimplementing policiestheprincipalwould
oppose if he knew more (Peters 1981, Weir and Beetham 1999). Second, Blinder’s \responsible
central banker" must not be subject to the unconscious biases that may follow each agent’s
unique experience, knowledge, and interests. Instead, he can tweak the \preference function in
his head" at the drop of a hat. Finally, the legal strictures on central bankers tend to leave
substantial wiggle-room; Blinder himself laments the lack of discussion and consensus on targets
and weights by the FOMC (Blinder 1997, 5). When the law does not say precisely what (cid:11) and
k should be, there is no reason to expect all will interpret|or want to interpret|the law in the
same way. If agents can use the law to rationalize their pre-existing policy preferences, they are
2The European Parliament has learned how hard it is to hold an independent central bank \accountable".
Unfortunately,despite the spate of articles oncentral bankaccountability, basic questions|what does itmean to
beaccountable,whoshallenforceaccountability,andhow|remainfoggy(ironically,themeaningofthesubsidiary
concept of \transparency" is particularly contentious; see, e.g., the debate between central bankers Buiter [1999]
and Issing [1999]). Moreover, central bank accountability, proposed in an era of low in(cid:13)ation and prosperity,
remains wholly untested|there is not yet even an anecdote regarding a central bank which was held to account,
or changed its monetarypolicy because of accountability institutions (like legally de(cid:12)ned targets).
4
not constrained, but shielded from accountability.3
Because central bankers are neither homogenous nor straightjacketed, their own preferences
are likely to show up in policy. And monetary policy matters: most economists agree it has
real e(cid:11)ects in the short run, so central bankers will always have to consider the trade-o(cid:11) between
in(cid:13)ationcontrol andmaintaining stable economic output.4 Inthiscontext, anypresumptionthat
there is a single \right" level of in(cid:13)ation-aversion begs the political question, \Right for whose
interests?" Because the trade-o(cid:11) between in(cid:13)ation and economic stability has distributional
consequences, governments, political parties, and private actors di(cid:11)er in their preferred in(cid:13)ation
hawkishness. To this list of political actors, we must add the central bankers themselves. For
all the attention paid to grants of discretion to central bankers, what central bankers do with
discretionarypoweriswoefullyunder-theorized. Itistimetoaskhowcentralbankers’preferences
vary, whether their preferences are in(cid:13)uenced by other actors, and what e(cid:11)ect those preferences
have on economic outcomes.
2.2 The career and policy choices of bureaucrats
This paper approaches the preferences of monetary policymakers by way of their career paths.
The e(cid:11)ects of career incentives on public o(cid:14)cials are often cited in the mass media, but have
received only sporadic attention in political science. It is worth reviewing several examples from
the literature to gain a sense of how career paths in(cid:13)uence policy, what options exist for civil
servants to advance their private or political careers, and how opportunity structures vary across
countries.
Political actors’ career ambitions vary; some simply want to stay in place, others to rise to
higher o(cid:14)ce within a given sector or organization, and still others to rotate between two sectors,
ratcheting higher with each revolution. American politics is replete with examples of all three
career trajectories. Since Mayhew (1974), political scientists’ understanding of Congressional
behaviorhascentered onlegislators’ overriding needto preservetheircareers throughre-election,
and since Schlesinger (1966), scholars have recognized that many legislators seek to rise above
3This critique of purely legal arrangements that purport to \solve" the monetary delegation problem also
applies to the concept of in(cid:13)ation targeting (Svensson 1997), adopted by several countries|the UK, Canada,
Spain, Australia, Finland, New Zealand, and the ECB|throughout the 1990s. Many economists and central
bankersconsiderlegallyenshrininganin(cid:13)ationgoalacrucialsteptowardscentralbankaccountability. Essentially
all in(cid:13)ation targeting countries follow a \(cid:13)exible" in(cid:13)ation target in which the central bank accepts deviations
fromthetargettosomedegree(orforsomeperiod)tominimizeoutputvariability(Siklos2002,Cukierman2002).
However,thisdegreeof(cid:13)exibility(i.e.,theweightofthetradeo(cid:11)betweenin(cid:13)ationandoutputstabilization)isnever
dictated, policed, or even publicized, nor is the output target ever explicitly set (Cukierman 2002). Finally, the
mechanism bywhich a governmentwould enforce the in(cid:13)ation goal is usually either unclear, untested,or di(cid:14)cult
to impose. Indeed,per McCallum’s critique of CBI, governmentsmay notevenwish to punishcentral bankswho
fail to quickly return to the target in(cid:13)ation level. In this context, a central banker who o(cid:14)cially enjoys only
instrument independence (in the Debelle and Fischer [1994] sense) could exploit weak oversight and information
advantagestoestablishdefacto goalindependence,atleastintheshortrun. Evencentralbankerswith(partially)
assigned goals retainsubstantial monetary policy (cid:13)exibility,andthe preferences of individual centralbankersstill
matter underin(cid:13)ation targeting regimes.
4Walsh (1998, Ch. 1) is a good place to start on the short run trade-o(cid:11) between output volatility and price
stability. ThepopularTaylorRuleapproximationofmonetarypolicydecisionsisoneembodimentofthisdilemma,
and empirical work accepting this framework suggests that central bankers’ preference di(cid:11)er and matter. For
example, Judd and Rudebusch (1998) argue that estimating separate Taylor-rule-like reaction functions for the
FedunderChairmen Greenspan, Volcker, andBurns reveals systemically di(cid:11)erentbehavior.
5
their o(cid:14)ce; from the state house to the US House, from the US House to the Senate, and
so on. In both cases, legislators’ policy preferences result from the career incentives created
by the electorate|and sometimes even the prospective electorate of a new o(cid:14)ce (Carey 1994,
1996; Rothenberg and Sanders 2000). In contrast, the executive branch is often described as
a revolving door for \in-and-outers", o(cid:14)cials who are (cid:12)rst employees of regulated sectors, then
regulatorsthemselves,and(cid:12)nallylobbyistsorleadersfortheregulatedoncemore(see,e.g., Heclo,
1988). In recent years prominent US o(cid:14)cials, including Vice President Dick Cheney, Securities
and Exchange Commission chair Harvey Pitt, and Treasury Secretary Robert E. Rubin, have
circulated throughtheprivate andpublicsectors, andineach case appearedto some observers to
make policy choices based on their career experiences.5 Of course, government o(cid:14)cials generally
deny that career-incentives shape their policy choices, which suggests that we will have to look
for indirect evidence of career e(cid:11)ects on policy.
Careerpathsmatter inothercountries besidesthe US. Reviewing the comparative evidence,
Schneider (1993) argues that where a bureaucrat stands depends not only on where he sits, but
onwherehehas sat andwill sit. Inmanycountries, seniorbureaucratsoftenrise tothetop ofthe
civil service only to jump to a lucrative private sector job. Known as pantou(cid:13)age in France, this
pattern is also found in Denmark, Japan, the Netherlands, and Spain (Rouban 1999, Schneider
1993, Jensen and Knudson 1999, van der Meer and Raadschelders 1999, Alvarez de Cienfuegos
1999). On the other hand, pantou(cid:13)age is limited or forbidden in Belgium, Britain (except the
Treasury), and Sweden|intensifying comptetition for the next rung on the civil service ladder
(Brans and Hondeghen 1999, Dargie and Locke 1999, Pierre and Ehn 1999).
This competition provides partisan governments leverage over agencies. Hence promotion
to the top of the civil service has grown more politicized in Britain and Germany, and has long
been a feature of bureaucratic appointments in most other European democracies (Peters 1997,
Mayntz and Derlien 1989, Dowding 1995, Page and Wright 1999). And though many consider
it the paradigmatic case of bureaucratic dominance, Japan may provide the best example of
political principals manipulating bureaucrats’ careers to ensure policy meets the government’s
needs. Loyal Japanese bureaucrats are often rewarded with private or political posts: thanks
to the support of the ruling party, from 1949{1980 the lower house of the Diet contained, on
average, 51 former bureaucrats, including 10 from the Ministry of Finance; bureaucrats rarely
ran for the opposition (Naka 1980, reproduced in Ramseyer and Rosenbluth 1993; Kim, 1988).
5Critics link Halliburton’s no-bid contract to rebuild Iraqi oil (cid:12)elds to Cheney’s years at Halliburton and
large retirement bonus (e.g., David Lazarus, \Con(cid:13)ict of interest for vice president?" San Fransisco Chron-
icle, Nov. 3, 2002, G1). To others, the whole of Cheney’s career|through two presidential administra-
tions and his interregnum as CEO|revolves around defense department favors to Halliburton; in Cheney’s (cid:12)ve
years there, the company received $2.3 billion in federal contracts, up from $1.2 billion in the previous (cid:12)ve
(Robert Bryce, \Cheney’s Multi-Million Dollar Revolving Door", Mother Jones News Wire, August 2, 2000,
http://www.motherjones.com/news wire/cheney.html; KnutRoyceandNathanielHeller,\CheneyLedHallibur-
ton To Feast at Federal Trough", Center for Public Integrity, http://www.public-i.org/story 01 080200.htm,
accessedJuly24,2003). DanielGross arguesHarveyPitt’s tepidresponsetothecorporateaccountingscandals of
2001{2 re(cid:13)ectshisneedto\remainviableinthesystem"afterleavingo(cid:14)ce,onthepresumptionthelawyerwants
to grow more wealthy representing accounting (cid:12)rms (\The Pitt: Why Chairman Harvey Pitt has failed," Slate,
Nov. 1, 2002, http://slate.msn.com/?id=2073450). And Joseph Stigliz (2002) claims Robert Rubin’s approach
to international economic policy can be explained byhis career path, which led from Goldman Sachs to Citibank
bywayof the Treasury.
6
Disloyal bureaucrats face the blacklist.6
The use of career rewards and punishments to a(cid:11)ect policy implementation has implications
for the study of delegation that are not fully appreciated. Most of the vast delegation literature
focuses on formal, legal means of monitoring and control (see Bendor, Glazer, and Hammond
[2001] for a review). Initial pessimism that political agents cannot be controlled|since formal
avenues are often cumbersome and seldom used|has given way to tentative optimism that some
principals manage agents e(cid:11)ectively without frequent recourse to formal sanctions (Huber and
Shipan 2002). It is often argued that an e(cid:11)ective principal need not be an active overseer, but
instead can rely on a combination of credible sanctions and sporadic, perhaps even third-party,
monitoring (Weingast and Moran 1983; McCubbins and Schwartz 1984). But principals may
also control agents through extra-legal mechanisms: rewards and punishments that require no
hearings or legislation. Where available and e(cid:11)ective, informal methods may even be preferred,
since they allow bureaucrats to maintain an aura of independence. In particular, contingent
career rewards as a subtle means of mastering agents bears investigation, and in this paper, I
demonstrate the utility of career incentives to uncover new insights in the well-plowed (cid:12)eld of
monetary delegation.
Career mechanisms for bureaucratic control also open the playing (cid:12)eld to groups outside
the government. Studying career incentives thus gives us theoretical and empirical leverage over
the case of an agent serving several masters. Recent work on delegation by multiple principals
tackles situations where the roles and powers of the principals are clearly de(cid:12)ned (Epstein and
O’Halloran 1996, 1999; Morris 2000). But many political principals|such as interest groups
and (cid:12)rms|lack a formal role in policymaking and implementation, yet still exert in(cid:13)uence by
informal means. Career rewards may be among the most potent tools these \shadow principals"
possess for manipulating bureaucrats.
2.3 Career incentives for monetary policy making
The application of career incentives to monetary policy delegation is not entirely new. The same
paperwhichpopularizedthe\independenceplusconservatism" solution alludestoa career-based
centralbankconservatism(Rogo(cid:11),1985),anotionsecondedbyLohmann(1992)andStigliz(2002,
p. 19). Central bankers are often veterans of the (cid:12)nancial sector, the argument goes, and the
promise of future career rewards renders the (cid:12)nancial sector a shadow principal of the central
bank,encouragingconservativemonetarypolicy.7 Theideathat(cid:12)nancialsectorexperiencemakes
6Ramseyer and Rosenbluth (1993) document many career mechanisms by which the governing Liberal Demo-
cratic Party manipulates Japanese bureaucrats, including threats of dismissal and control over promotion within
the bureaucracy. Most important, elite bureaucrats’ wages are kept below market to ensure obedience to the
government, which has the legal right to grant or deny lucrative private and public jobs. Top civil servants re-
tire early to avail themselves of these career rewards, a process known as amakudari, or \descent from heaven"
(Koh, 1989). By showing that political principals can control seemingly independent expert agents using career
incentives, Ramseyerand Rosenbluthturnedthe notion of Japanese bureaucratic dominance on its head.
7Posen (1995) takes the argument further, claiming CBI is irrelevant|only (cid:12)nancial sector in(cid:13)uence matters.
However,hisproxiesof(cid:12)nancialsectorstrength(alackofuniversalbanking,bankingregulationbythecentralbank,
andthepresenceoffederalismandpartyfractionalization)aresomewhatdistantfromtheconceptof(cid:12)nancialsector
in(cid:13)uenceandmaypickupspuriouscorrelation fromalternative sourcesof centralbankindependence(federalism,
for instance). The argument itself remains provocative, but without stronger evidence, we should not dismiss
central bankinstitutions ando(cid:14)cials as epiphenominal.
7
central bankers more in(cid:13)ation-averse also appears in the literature on the Federal Reserve. For
example, Havrilesky and Gildea (1991) (cid:12)nd that years spent in the (cid:12)nancial sector predicts
Federal Open Market Committee (FOMC) members’ dissents in favor of tightness, while Wooley
(1984)andBelden(1989)linkregionalbankpresidents’greaterconservatismtotheirtheircareers
in private banking. In the US, several former FOMC members attributed quitting the Fed to
the gap between public and private sector salaries.8 The evidence for career-concerned central
bankers grows when one notes from 1950 to 2000, the median Fed Governor chose to serve only
5.2 years of a guaranteed fourteen year term; many Governors re-enter the private sector on
leaving the Fed. To date, however, the career incentives argument has not been extended across
countries or career types.
Recognizing that central bankers are as likely to be career bureaucrats as (cid:12)nancial sector
types opens a new front for the career-incentives approach. Just as a former private banker,
hoping to secure a better private banking job later, may bear private banks’ preferences in
mind whensetting monetary policy, so may a bureaucrat or politician with ministerial ambitions
accommodate the government’s election-driven desire for economic stability. Career concerns
may loom large for a bureaucrat serving a stint at the central bank since governing parties in
industrializeddemocraciesexercisesigni(cid:12)cantcontrolovertheappointmentofseniorcivilservants
and subcabinet ministers, even where the civil service is nominally neutral.
For both bankers and bureaucrats, the human capital, social networks, and preferences ac-
quiredoveracareerpointtothelikelyshadowprincipalsatworkbehindthescenes. Totheextent
that monetary policy makers are either ‘government’ or ‘(cid:12)nancial’ types who feel pressured by
these sectors to be doves or hawks, the careers of central bankers constitute an observable mea-
sure of conservatism in central banks. Since governments have an electoral incentive to keep
the economy stable, while banks tend to be particularly concerned with in(cid:13)ation, my basic pre-
diction is simple: central bankers with career backgrounds in the (cid:12)nancial sector should be more
anti-in(cid:13)ation than central bankers who are career bureaucrats.
Former (cid:12)nance ministry o(cid:14)cials and former central bank sta(cid:11) (i.e., below the monetary
policy making level) comprise a possible exception to this hypothesis. Given their expertise and
opportunitiesto make connections withbankingsectoro(cid:14)cials, thesebureaucratsaremore likely
tohavedevelopedtheirownviewsonmonetarypolicyandarearguablybetterequippedtoplunge
into the (cid:12)nancial sector than other bureaucrats. As we shall see in Section 3.3, these o(cid:14)cials
also have distinct career patterns from other bureaucrats who (cid:12)nd themselves on central bank
boards. Therefore, I distinguish (cid:12)nance ministry and central bank experience from other types
of government experience, holding out the possibility that their career incentives may be quite
di(cid:11)erent.
2.4 Career socialization and monetary policy
There is an another interpretation of correlation between (cid:12)nancial sector experience and cen-
tral bank conservatism: rather than career incentives, perhaps long sojourns in private banking
8ThisviewhasbeenmadeexplicitbyformerGovernorsRobertC.Holland,whoprotestedhecouldnotpayhis
children’s tuition bills on a Fed Governor’s salary, and Je(cid:11)rey M. Bucher, who lamented the \(cid:12)nancial penalty"
he paid to leave the private sector for the Fed. Both men served only three years before returning to private
employment(Katz 1992).
8
engender conservative ideas about in(cid:13)ation and monetary policy. At least three di(cid:11)erent mech-
anisms could produce pre-existing preferences for hawkish monetary policy: 1.) bankers may be
socialized tobelievethatin(cid:13)ation-(cid:12)ghting istheprimarypurposeofmonetarypolicy, 2.) wealthy
private bankers’ material interests may induce anti-in(cid:13)ation feeling,9 and 3.) conservatives with
anti-in(cid:13)ation views may self-select into (cid:12)nancial careers.
Ofthethreepossibilities, socialization seemsmostpromising. Itisreasonable to suspectcen-
tralbankers’approaches to policyproblemsare in(cid:13)uencedbypriorwork experience, andthatthe
monetarypolicyconvictions ofcareer-based peergroupsin(cid:13)uencecentral bankers.10 Thepremise
that work experience in(cid:13)uences attitudes is widely held by organization theorists (Hambrick and
Mason 1984, Gunz and Jalland 1996, van Maanen and Schein 1979). Experiments show that
industry-background and past functional roles within organizations in(cid:13)uence executive decision-
making (Dearborn and Simon 1958, Beyer et al 1997, Melone 1994, and Hitt and Tyler 1991)
and in particular what information decisionmakers perceive as relevant (Rosman, Lubatkin, and
O’Neill 1994). Though there is scant recent work, students of political elites noticed in the 1970s
thatcareersocialization hadpervasive, lingeringe(cid:11)ects onthebehaviorof policymakers(Putnam
1976). One scholar of comparative elites went to far as to assert that \[v]alue-socialization is not
parental, or even based on early political experience, but apparently takes place from working in
a given (cid:12)eld or institutional setting" (Barton 1973, p. 242; quoted in Putnam 1976).
For a political example of career socialization, consider American Supreme Court justices.
Long viewed as wise arbiters of legal precedent, justices have turned out to be political beings
whose policy preferences systematically in(cid:13)uence their decisions (Segal and Spaeth [1993] built
the co(cid:14)n for the legal theory, and Bush v. Gore hammered the nails). In part, justices owe
their policy preferences to their career tracks; for example, justices with prosecutorial experience
are more conservative on civil liberties decisions, controlling for the judge’s partisanship and
appointingpresident’sideology(TateandHandberg1991). SinceSupremecourtjusticesgenerally
lack career concerns, this seems to follow socialization (and perhaps some self-selection), with
the experience, training, and environment of prosecutors imparting conservative policy beliefs.
For (cid:12)nancial-sector-trained central bankers, the socialization argument is similar: work
within a sector that fears in(cid:13)ation and considers the struggle against it the only acceptable
monetary stance should shape the central banker’s own attitudes on monetary policy.11 Hence,
9SeeScheve(2002a,b)forcross-nationalevidencethatassetwealthleadstoanti-in(cid:13)ationattitudes,andBurden
(2000) for evidence thatpolicymakers consider theirmaterial interests inpassing laws
10Some speculate that central bankers might someday form (Kapstein 1992) or perhaps already constitute a
cohesive community collectively puzzling through policy choices; this perspective would relocate the socialization
process within the central banking community itself. This paper does not suppose the existence of a policy
community of central bankers, though the argument made here would jibe with the notion of several distinct
communities ((cid:12)nanciers, bureaucrats, and economists) intersecting the world of central banking. In particular,
the growing cooperation among central bankers and academic economists on monetary policy research has struck
several observers (e.g., McCallum 1999), but as the data collected here show, economists remain a minority of
central bank leaders, and comprehensive explanations of central banker behavior will thus need to reach beyond
the economic community.
11Private bankers have a long-standing reputation for conservatism on in(cid:13)ation, though I am unaware of any
systematic surveys of their attitudes. In the US, members of Congress and the Federal Reserve believe that \[i]f
one’sgoalistominimizein(cid:13)ation... asurewaytoachievethatgoalistohaveprivatebankers|whoareamongthe
world’s(cid:12)ercestin(cid:13)ationhawks|appointtheregionalbankpresidents"(S.Greenhouse,\Showdown: Thepopulist
versus the Fed." New York Times October 12, 1993, D1). And in many cases, banks’ fear of in(cid:13)ation surely has
a rational basis. For example, Santoni (1986) provides evidence that the stock prices of banksreact negatively to
9
according to the socialization hypothesis, central bankers with career backgrounds in the (cid:12)nancial
sector should be more anti-in(cid:13)ation than other central bankers.
The socialization hypothesis holds that past career experience determines preferences over
policyitself, whilethecareer-incentives hypothesisseesinpolicychoicesameanstoaprivateend.
Both perspectives are theories about the e(cid:11)ects of career paths, and to the extent that either
or both mechanisms act on central bankers, career variables are an important antecedant of
monetary policy. In the Model Appendix, I show how either career-incentive-induced preferences
or socialized policy preferences could a(cid:11)ect the policy choices made by Rogo(cid:11) (1986) central
bankers; readersinterested inaformalization ofthe argument shouldturnthere now. Inthe next
section, I test the career e(cid:11)ects approach by looking at in(cid:13)ation performance across time and
countries, then present three tests to distinguish career incentives from pre-existing preferences.
3 Testing the career e(cid:11)ects approach to monetary policy:
Evidence from advanced industrialized democracies
The theory elaborated thus far suggests a number of testable hypothesis regarding monetary
policy making. For now, I focus on the simplest empirical implication: monetary policy should
be more anti-in(cid:13)ationary in the hands of (cid:12)nancial sector types than government bureaucrats.
This argument contains several steps|between careers and preferences, between preferences and
policychoices(votes), andbetweenpolicyandoutcomes(in(cid:13)ationandvariationinrealvariables).
Here I attend only to the overall linkage between central bankers’ careers and in(cid:13)ation because
these are the two concepts most easily measured and compared over a broad array of countries
and periods. I then attempt to distinguish the role of career incentives and socialized preferences
by considered the context in which career e(cid:11)ects on in(cid:13)ation operate.
3.1 Measurement
In developing measures of central banker’s careers, the (cid:12)rst choice is whether to focus on what
they did before joining the central bank’s board, or what they did after. There are theoretical,
empirical, andpractical reasonsto concentrate onmeasuresbasedonpastcareerexperience. Itis
obvious that prior experience provides the context in which career socialization takes place, and
should therefore be a good measure to test the socialization hypothesis. But prior careers are
importantfortheincentivesargumentaswell,sinceexperienceprovidesthespecializedknowledge
and social networks on which (necessarily subtle and informal) job-for-policy exchanges may be
based. Choosing to work in a sector also reveals preferred career rewards, and I show in Section
3.3 that earlier work in a sector also strongly predicts post-central bank career patterns. Future
careers are central to the career incentives story, but from the perspective of central bankers
they are uncertain. A central banker may aim towards a future career that fails to materialize
for any number of reasons (e.g., poor health, poor performance, or the arrival of an unexpected
alternative). To the extent the central banker’s past reveals their expectations and preferences
at the time they served on the monetary policy authority, prior career measures should not be
unanticipatedin(cid:13)ation, as mightbe expected of net holders of nominal assets.
10