Central bankers are key decision makers in all modern economies. Their decisions regarding interest rates and financial market regulations have profound effects on inflation, unemployment, economic growth, and financial stability. Many believe that the recent global financial crisis occurred in large part because of the failures of central bankers. Likewise, many fear that the Federal Reserve in the United States will raise interest rates too aggressively in the near future, and doing so will harm the country’s economic recovery. Given the high stakes involved, it seems imperative to understand what drives central bankers’ decisions.
The conventional wisdom holds that central bankers are apolitical technocrats who seek to fulfill their mandated objectives to the best of their abilities. In Bankers, Bureaucrats, and Central Bank Politics, Christopher Adolph shows convincingly that this established view of central banking is mostly wrong. The actions of central bankers, Adolph argues, depend heavily on their personal beliefs and interests.
The book introduces a novel “career theory” of central bank behavior. The starting point of the theory is that central bankers are agents with their own independent preferences and beliefs about monetary policy. Those preferences influence how they set interest rates and help explain variation in inflation and unemployment rates. A key contribution of Adolph’s career theory is to shed light on the origins of central bankers’ monetary policy preferences. The theory posits that the preferences of central bankers are systematically related to individuals’ previous career experiences. Past careers, according to the author, matter for two main reasons. First, previous careers shape individuals’ ideas and beliefs through processes of socialization. For example, individuals with experience working in a private bank are typically more hostile to inflation than individuals whose previous careers were in the public sector. Second, prior careers shape individuals’ interests. Since central bankers often want to return to their old career after they leave their post in the central bank, they have an incentive to adopt policies that will please their old bosses, who are also their potential future bosses. The book’s core argument is that the past careers of central bankers shapes monetary policies and economic outcomes.
To test the career theory of central banking, Adolph constructs an original data set of the career experiences of central bankers. Most of the analyses focus on a data set that covers 598 central bankers from 20 developed countries between 1950 and 2000. The book also examines an original data set on the careers of central bankers in a large number of developing countries. This data set alone is a major contribution, and one that scholars of monetary politics will undoubtedly find useful in the future.
Using this novel data set, Adolph presents an impressive array of empirical tests of the career theory of central banking. First, he shows that the types of central bankers in a country heavily influence inflation rates. Inflation rates tend to be lowest when the central bank is populated by individuals with a history of employment in the financial sector. For developed economies, average inflation rates are highest when many central bankers worked in certain types of government agencies, namely, those unrelated to finance. In developing economies, however, inflation is highest when central bankers previously worked in private (nonfinancial) businesses. These findings provide compelling evidence that the preferences of central bankers, as determined by their career trajectories, are consequential.
Additional empirical analyses contained in the book delve deeper into these issues. In Chapter 4, Adolph shows that central bankers’ careers influence interest rate decisions in developed countries and also influence how individual central bankers vote on monetary policy decisions in the United States. Chapters 6 and 7 provide evidence that central bankers’ prior careers affect the unemployment rate, though this effect is contingent on the degree of central bank independence and the structure of the labor market. In the final empirical chapters, the book takes a step back in the causal chain. Chapter 8 shows that right-wing governments are more likely to appoint central bankers with a background in private finance. Similarly, Chapter 9 reveals that government partisanship also affects whether certain types of central bankers survive in office. All of the empirical analyses are exceptionally well executed, and Adolph discusses his modeling choices clearly and carefully.
Overall, Bankers, Bureaucrats, and Central Bank Politics is an impressive book that makes a number of important contributions. In particular, it presents a very convincing case that central bankers’ careers matter for monetary policy. This is an important finding that will reshape how scholars theorize about monetary politics.
One limitation of the book is that it does not provide a great deal of evidence about why central bankers’ previous careers matter. Is it due primarily to career socialization, career incentives, or some other channels? Adolph suggests that both socialization and career incentives are relevant, and the book does present some indirect evidence that suggests that these mechanisms are operative. However, the evidence in support of these mechanisms is less compelling than the evidence showing that careers matter. As an example, consider the finding that working in private finance before becoming a central banker increases the likelihood that someone will work in private finance after leaving the central bank. Adolph argues that this provides evidence that “[p]re-central bank experience scores constitute valid measures of career incentives” (p. 82). However, it is equally plausible that where people worked early in their career simply provides an indication of their revealed work preferences. This book convincingly shows that central bankers’ previous careers have an important effect on monetary policy, but it does not fully resolve the question of why career histories are so important.
In sum, this is an excellent book that is sure to have a major impact on the field of monetary politics. The career theory of central banking will force many scholars to reconsider their assumptions about how central banks work, and it also holds some important lessons for scholars of bureaucratic politics and political economy more generally. In addition, the meticulous empirical analyses make this book a useful read for all quantitative social scientists, in particular younger scholars who may be seeking out a model to emulate in their work. For these reasons, Bankers, Bureaucrats, and Central Bank Politics deserves a wide audience.
