Raymond Hicks

Price Stability and Central Bank Independence: Discipline, Credibility, and Democratic Institutions

Despite mixed empirical evidence, in the past two decades central bank independence (CBI) has been on the rise under the assumption that it ensures price stability. Using an encompassing theoretical approach and new yearly data for de jure CBI (seventy-eight countries, 1973–2008), we reexamine this relationship, distinguishing the role of printing less money (discipline) from the publics beliefs about the central banks likely actions (credibility). Democracies differ from dictatorships in the likelihood of political interference and changes to the law because of the presence of political opposition and the freedom to expose government actions. CBI in democracies should be directly reflected in lower money supply growth. Besides being more disciplinarian, it also ensures a more robust money demand by reducing inflation expectations and, therefore, inflation. Empirical results are robust and support a discipline effect conditioned by political institutions, as well as a credibility effect.

International Finance and Central Bank Independence: Institutional Diffusion and the Flow and Cost of Capital

Research on central bank independence (CBI) focuses overwhelmingly on domestic causes and consequences. We consider CBI in relation to global finance. A first step links decisions to reform central bank legislation to a perceived need to attract capital in the form of foreign direct investment or sovereign borrowing. A second step models investors’ actual decisions as a function of CBI. We test our argument on a sample of 78 countries (1974–2007). Logit models investigate the determinants of central bank reform. Results show the effect of international capital through a direct-competition channel and through learning in the context of competition. Socialization of countries in networks of intergovernmental organizations is also a determinant of CBI reform. In addition, we show that CBI affects the flow and cost of capital in non-OECD countries, before CBI became globally widespread, and where political institutions allow the central bank to de facto be credible.

Reputations, Perceptions, and International Economic Agreements

How do countries’ actions on the international stage affect their reputations? We propose that, particularly when evaluating countries about whom individuals may have few prior beliefs, international agreements may hold particular sway in establishing countries’ reputations. Specifically, if a relatively unknown country joins an organization with a country that has a good reputation, individuals will judge that original state to be less risky; if the better-known countries are generally perceived to have a bad reputation, the less-known state will also look more risky. This article presents evidence from a survey experiment in which individuals are asked about the weight of various factors in their perceptions of countries’ reputations. Subjects would randomly receive a prompt about a country’s domestic policy reform or its ties to other countries via economic or cultural agreements. The results show that states’ international ties play a role in assessments about country reputations. We also examine possible mechanisms underlying this finding. Lower risk associated with agreements with good countries is largely a function of anticipated economic benefits. However, the higher risk associated with agreements with bad countries seems to be more a function of anticipated political closeness between countries.

Politics, Institutions, and Trade: Lessons of the Interwar Era

Recent studies cast doubt on the value added of international trade agreements and institutions. Using a new data set that consists of about 35,000 observations on the trade of fifty-four nations between 1919 and 1938, we examine whether this skepticism also applies to the infamous interwar trade blocs. Traditional historical accounts attribute to them a large drop in international trade and a rise in the political tensions that would later erupt in World War II. In this study, we show that no bloc raised trade among its members as a whole or decreased trade between members and nonmembers. However, our findings are not wholly consistent with the skepticism recent studies express. We argue that conflicts of interest among the great powers encouraged the emergence of the bloc system and also gave rise to intrabloc trade shifts consistent with the political interests of their great-power hubs. The political-military alliances these conflicts created also reduced trade between their signatories, and we argue more generally that the causal chain runs from politics to trade. As a result, measuring only the effect of agreements and institutions on aggregate trade between their members can generate inaccurate estimates of their value added.

Does Enforcement Matter? Judicialization in PTAs and Trade Flows

This paper focuses on the variability of judicialization across preferential trade agreements (PTAs) and their impact on trade flows. We develop a categorization of PTAs that contrasts enforcement mechanisms with the level of trade policy discretion allowed by a trade agreement and the degree of flexibility allowed for members. Utilizing an original dataset of PTAs signed by countries in Asia, which has emerged as one of the most active regions of PTA formation and which exhibits wide variability in levels of judicialization, we compare the effects of trade policy discretion, flexibility provisions, and enforcement mechanisms in PTAs on trade flows. We examine the empirical strength of our theoretical framework distinguishing between discretion, flexibility, and enforcement using confirmatory factor analysis. The empirical analysis then goes on to examine their respective effects on trade flows. The results show that agreements with strong commitments, that is, those that remove more trade policy discretion from a government, lead to a greater expansion of trade between signatories. Enforcement and flexibility mechanisms, however, have mixed effects.

Central Bank Independence Before and After the Crisis

This paper discusses whether central bank independence (CBI) has changed since the financial crisis. Central banks’ quasi-fiscal policies during and after the crisis, and macro-prudential and unconventional monetary policies, which are more redistributive than traditional monetary policy, have led to questions about the desirability of CBI. Some even argue that CBI is under threat. However, a survey among central bankers and updates of legal proxies for CBI do not provide strong evidence that CBI has diminished since the financial crisis. The only indication for this is the increase in the turnover rate of central bank governors in advanced countries.

Do We Really Know the WTO Cures Cancer

This article uses a replication experiment of ninety-four specifications from sixteen different studies to show the severity of the problem of selection on unobservables. Using a variety of approaches, it shows that membership in the General Agreement on Tariffs and Trade/World Trade Organization has a significant effect on a surprisingly high number of dependent variables (34 per cent) that have little or no theoretical relationship to the WTO. To make the exercise even more conservative, the study demonstrates that membership in a low-impact environmental treaty, the Convention on Trade in Endangered Species, yields similarly high false positive rates. The authors advocate theoretically informed sensitivity analysis, showing how prior theoretical knowledge conditions the crucial choice of covariates for sensitivity tests. While the current study focuses on international institutions, the arguments also apply to other subfields and applications.

Sovereign Credit Ratings and Central Banks: Do Analysts Pay Attention to Institutions?

Credit rating agencies have been an important determinant of countries’ cost of capital in the last couple of decades. This paper studies the effect of the governance of modern central banks on the ratings assigned by the credit rating agencies Standard and Poor’s and Moody’s. Until recently, the rating process was not public. Even still, the factors or precise methodologies used by the agencies remain uncertain. We argue that the independence and transparency of central banks are important to the overall risk of repayment. This is because both features are signals of high quality institutional governance, which credit rating agencies link to willingness and ability to repay. We suggest that both independence and transparency have the potential to improve economic and political stability, and, therefore improve countries’ credit rating. On the other hand, we argue that open conflict between the central bank and the government, reflected in loss of employment for top central bank officials, should have the opposite effect.