EuropeanJournalof

POLITICAL
European Journal of Political Economy
Vol. 13 (1997) 201-224

ELSEVIER

ECONOMY

The bureaucratic and partisan behavior of

independent central banks: German and
international evidence
Roland Vaubel

University of Mannheim, D-68131 Mannheim, Germany

Received 1 December 1995; revised 1 July 1996; accepted 1 August 1996

Abstract

Central bank staff depends positively on the country's population size, its per capita
income and the central bank's independence with respect to salaries. In the developing
countries, exchange rate pegging can reduce central bank staff. Among the industrial
countries, France, Belgium/Luxembourg and Germany have the most overstaffed central
banks. In Germany, central bank revenue has a significantly positive effect on staff size. A
non-parametric test for the German Bundesbank confirms the hypothesis that monetary
expansion (M1) accelerates when the government has a political majority in the central
bank council at the beginning of the pre-election period or when the political majority in the
council changes in favor of the government during the pre-election period (and that
monetary expansion decelerates if the reverse is true).
JEL classification: E3; E5
Keywords: Central banks; Political business cycles

* E-mail: vaubel@pool.uni-mannheim.de.
i Helpful comments from Thomas Havrilesky and Pay-Uwe Paulsen and computational assistance
from Elisabeth R&lelsperger-Pfeiffer, Ralf Seisreiner and Thomas Traut are gratefully acknowledged.
0176-2680/97/$17.00 Copyright 1997 Elsevier Science B.V. All rights reserved.
PII S0176-2680(97)00004-9

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R. Vaubel / European Journal of Political Economy 13 (1997) 201-224

1. Introduction

From a public choice perspective, an independent central bank is the polar case
of an uncontrolled bureaucracy 2. The economic theory of bureaucracy assumes
that public officials who have little control over their income are mainly interested
in power, prestige, amenities and, of course, in preserving their independence.
Power, prestige and amenities are provided by a large staff. The prestige motive
implies that central bankers who are independent of the government pay close
attention to public opinion in their home country 3. They value prestige not only
for its own sake but also because a favorable public opinion is the best protection
of their independence against a hostile national government. Independent central
bankers may also wish to pursue ideological objectives and to improve the
electoral chances of their preferred parties.
Over the last few years, a large number of studies has analyzed the correlation
between central bank independence and inflation. There is a broad consensus that
central bank independence tends to reduce both the average rate and the variability
of inflation (even though there are important differences and counterexamples 4 as
well as problems of common-cause interdependence 5). Much less attention has
been given to the question of how central bank independence affects staff size and
monetary partisanism. This paper contributes to filling this gap.
Section 2 tries to explain the level and growth of central bank staff. It contains
a comparison of staff growth at three independent and three dependent central
banks of industrial countries (Section 2.1), a large international cross-section
analysis of the level of central bank staff (Section 2.2) and a time series analysis of
staff size at the German Bundesbank (Section 2.3).
Section 3 of the paper analyses the German Bundesbank from the perspective
of political business cycle theory. While the dependency hypothesis, the simple

2 For the bureaucratic approach to central bank analysis see notably Chant and Acheson (1972,
1973), Toma (1986), Shughart and Tollison (1983) and Boyes et al. (1988).
3 Thus, the same central bank charter may lead to different inflation rates in different countries
(Vaubel, 1990). The transposition of the Bundesbank charter to the European level may be a case in
point. For an empirical simulation see Vaubel (1994).
4 For example, the Weimar byperinflation of 1923 was generated by an independent central bank.
Conversely, Japan has experienced one of the lowest inflation rates since the breakdown of the Bretton
Woods System even though, according to a recent study, the Bank of Japan ranks only 17th in terms of
independence. Finally, since 1970, the U.S. inflation rate has been about 2 percentage points higher per
annum than the German inflation rate even though the Federal Reserve and the Bundesbank enjoy more
or less the same degree of independence.
5 As Pollard (1993) has pointed out, the correlation between central bank independence and
price-level stability may largely be due to the fact that both are desired by an inflation-averse public.
The actual effect of central bank independence on inflation may be much less important.

R. Vaubel/ European Journal of Political Economy 13 (1997) 201-224

203

Table l
Compound growth rates of central bank staff in selected industrial countries (percent per annum)
1950-1985

1970-1989

0.8
2.9

0.5 a
2.7 "

1.3
1.3

1.1
1.6

Switzerland
Average of independent central banks

1.0
1.03

1.3
0.97

France
Italy

1.0
0.3

0.7
1.0

United Kingdom
Average of non-independent central banks

- 1.2
0.03

-2.1
- 0.13

USA:
- Federal reserve system
- Federal reserve board
Germany (FR):
Total
- Direktorium
-

Maximum period b
1948-1985:
0.7
2.9
1949-1989:
1.7
1.7
1948-93:
0.6

0.8
0.0
1950-93:
- 1.4

Data sources: Bank of England, Report and Accounts, Banque de France, Compte Rendu, Banca
d'ltalia, Rapporto Annuale, Schweizerische Nationalbank, Gesch~iftsbericht, Deutsche Bundesbank,
Gesch~iftsbericht, Shughart and Tollison (1983); Board of Governors of the Federal Reserve System,
Annual Report; Statistical Abstracts of the United States.
a 1970-1985.
b Maximum period for which these staff data are available. For the time series see Table 2.

partisan and the rational partisan theory are all rejected, overwhelming support is
found for a novel explanation which I call the 'party preference hypothesis': the
Bundesbank tries to improve the electoral prospects of the government if the
government commands a partisan majority in the central bank council, and it tries
to prevent the government from being reelected if the opposition parties have a
partisan majority in the central bank council. The Bundesbank is independent but
not politically neutral.

2. The bureaucratic behavior of independent central banks

2.1. An international comparison of staff growth

Tables 1 and 2 show the postwar evolution of personnel at the six most
important central banks which have published or provided 6 their staff data for the

6 The Federal Reserve Board has not published these data since 1986 and does not even provide
them on request. Some of the data for the Bank of England and the Swiss National Bank are
unpublished and were kindly provided to me. The Bank of Japan did not respond to my request. The
German series contains a statistical break in 1990 owing to unification. The published sources are given
as notes in the tables.

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R. Vaubel / European Journal of Political Economy 13 (1997) 201-224

Table 2
The evolution of central bank personnel
At the

United

end of

Kingdom

1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991

8.250

7.450

7.270
7.110
7.040
7.180
7.380
7.310
7.350
7.230
7.350
7.250
7.700
7,700
7.800
7.750
6.800
7.600
7.900
8.000
7.700
7.675
7.600
7,000
6,250
6.056
5.800
5.690
5,470
5.320
5.370
5.245
5.155
5.140
4.985

France

12,139
12.209
12.185
11.863
11.892
11,640
11.472
11.429
11.418
11.355
11.396
11.400
11.406
ll.446
11.561
12.217
12.365
12.496
12.600
12.321
14.524
14,767
14.850
14.513
14,343
14.237
14.530
14.935
15.234
15.358
15.602
15.886
16.065
16.291
16.791
17.268
17.406
17.349
17.366
17.156
16.957
16.834
17.176
17.718

Italy

9.121
8.640
8.421
8.180
7.920
7.691
7.515
7.370
7,148
7.024
6.847
6.804
7.233
7.500
7.453
7.361
7.352
7.336
7.420
7.491
7.413
7.551
7.549
7.740
7.512
7.623
7,725
8.073
8.076
8.012
8.092
8.398
8,645
8.918
8.945
8.923
9.204
9.261
9,240
9d54
9,171
9,072
9,229
9.404

Switzerland

429
438
415
405
398
395
393
397
410
412
411
395
393
388
410
409
417
414
413
410
415
424
432
448
446
448
452
462
474
476
487
501
516
558
580
594
592
583
558
567
550
550
547
554

FR of Germany

USA

total

FR system

FR board

19.608
18.515
18.571
20.418
20.579
20.853
19.892
19.693
19,893
20.397
19.910
20.100
20,527
20.622
20.981
20.884
20.100
19.335
19.796
19.749
20.403
21.657
23.126
23.649
25.462
27.931
29.000
27.960
26.742
25.591
24.850
24.867
25.733
25,200
24,634
24,476
24.331
24.929

527
548
563
594
580
582
573
576
577
589
602
607
598
600
599
622
633
667
693
753
808
863
1.016
1.185
1.215
1.240
1.353
1.460
1.481
1.483
1.477
1.459
1.498
1,491
1.531
1.551
1.607
1.520

7,841
9,570
10,947
11.623
11.758
11,406
11,110
11.103
10.980
10.823
10,698
10.647
10.837
10.997
11.198
11,268
11.450
11.725
11,906
11.887
12.141
12.734
13.646
14.169
14.154
13.829
13.545
13.275
13.207
13.658
14.408
14.825
15.102
15.031
15.024
14,939
15.077
15,259
15.526
15.457
15.583
(17.519)
(18.237)

Direktorium
810
1.462
1.778
2.088
2.163
2.244
2.218
2.153
2.076
2.013
2.002
1.972
1.967
1.964
1.975
1.963
1.937
1.960
1.963
2.056
2.065
2.075
2.113
2.197
2.312
2.409
2.425
2.463
2.471
2.490
2.530
2.629
2.705
2.713
2.717
2,705
2,689
2.762
2.821
2.860
2.829
2.848
(2.939)
(2,973)

R. Vaubel/ European Journal of Political Economy 13 (1997) 201-224

Table 2 (continued)
At the United France Italy Switzerland FR of Germany
end of Kingdom
1992 4.550
17.189 9.542 576
1993 4.570
17.062 9.185 566

205

USA

total
Direktorium FR system FR board
(17.994) (2.900)
(17.632) (2.828)

Data sources: see Table 1.

postwar period. In 1950-85, the period for which all six central banks have
released staff data, total staff growth has on average been higher in the three
independent central banks (1.03% p.a.) than in the three other central banks
(0.03% p.a.). Since the sterling area and the franc zone have undergone major
changes in the 1960s, staff growth since 1970 is of particular interest. As can be
seen in Table 1, the annual compound rate of change has been highest for the U.S.
Federal Reserve Board, the Bundesbank and the Swiss National Bank and lowest
for the Bank of England, the Banque de France and the Banca d'Italia. The ranks
are almost the same if the data for 1950-85 are used. Table 1 suggests that
independent central banks are not only independent with respect to monetary
policy but also with respect to bureaucratic growth. Indeed, their superior inflation
performance may protect them against charges of dynamic inefficiency.
Another interesting finding is that staff at the Federal Reserve Board has
expanded faster than total staff in the Federal Reserve System. It seems that the
central administration is farther removed from political control than the provincial
reserve banks are. The fact that a concentration of staff at the center cannot be
observed at the German Bundesbank may be due to the different composition of
its central bank council: the Bundesbank, unlike the Federal Reserve System, is
governed by a central bank council in which the presidents of the reserve banks
(Landeszentralbanken) command a majority.
2.2. An international cross-section regression of staff levels

While a comparative analysis of long-term staff growth is possible for only a

small number of central banks, an international cross-section analysis of current
staff levels can be conducted for the 97 countries listed in Table 3. These data
have been published in the Morgan Stanley Central Bank Directory (1994).
The estimated equations are labor demand functions. The demand for central
bank staff is explained by central bank output and proxies for technology and
X-inefficiency. Since data on central bank equipment and land are not available,
labor is assumed to be the only factor of production. Since central bank salaries
are not known, we have to assume that the wage elasticity of central banks'

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R. Vaubel / European Journal of Political Economy 13 (1997) 201-224

Table 3
C e n t r a l b a n k staff. D e v i a t i o n s o f actual f r o m p r e d i c t e d n u m b e r s , 1993
Country

Actual

Deviation from number predicted by

numbers

Eq. (2)
persons

Eq. (4)
percent

persons

percent

Australia

2,121

- 134

- 6

- 438

Austria

1,251

- 16

- 1

205

- 17
20

Belgium/Lux.

3,165

1,560

97

1,930

156

Canada

- 43

2,071

- 1,366

- 40

- 1,552

Denmark

544

- 247

- 31

- 275

- 34

Finland ('92)

894

225

20

- 294

- 25

France ('92)

17,590

9,926

130

13,821

367

Germany

17,632

8,404

91

10,412

144

3,244

1,254

63

1,690

109

33

28

Greece
Iceland

150

Ireland ('92)

626

- 122

- 16

65

12

Italy ( ' 9 2 )

9,542

3,249

52

3,930

70

Japan ('92)

6,300

- 5,568

- 47

- 3,559

- 36

202

173

Malta
Netherlands

319
1,611

- 781

- 33

30

319

- 278

- 47

- 521

- 62

Norway ('92)

1,207

674

126

105

10

Portugal ('92)

2,293

171

1,300

131

Spain

3,308

- 2,883

- 47

599

22

878

- 113

- 11

- 875

- 50

- 203

- 26

- 1,015

- 64

-33

-969

- 17

New Zealand

Sweden ('92)
Switzerland ('92)
UK
USA ('92)

576
4,570
25,843

-2,292
- 54

Eq, (3)

10,692

71

Eq. (4)

Algeria

2,750

445

19

527

24

Argentina

1,500

- 40

- 3

- 610

- 29
98

Bahamas

210

117

126

104

6,497

2,570

65

2,459

61

Barbados

206

130

171

113

122

Belarus

364

- 313

-46

Bhutan

60

- 109

- 64

- 99

450

224

99

215

91

- 10

- 1,431

- 19

Bangladesh

Botswana ('92)
Brazil

6,215

-671

-501

-58
- 62

Bulgaria

542

- 877

- 62

- 764

- 58

Chile

750

- 861

- 53

- 821

- 52

2,221
4,583

- 15,493
2,076

-87
83

- 18,194
2,112

-89
85

China
Colombia
Costa Rica

1,119

503

82

555

98

Dominican Rep.

2,300

1,346

141

1,399

155

Egypt ('92)
E1 S a l v a d o r

5,583
829

2,548
55

84
7

2,615
93

88
13

200

- 25

- 11

- 57

- 22

2,213

- 368

- 14

Estonia
Ethiopia

R. Vaubel/ European Journal of Political Economy 13 (1997) 201-224

207

Table 3 (continued)
Country

Actual

Deviation from number predicted by

numbers

Eq. (2)

Eq.(4)

persons
Georgia

percent

persons

percent

240

- 163

- 40

- 223

- 48

Ghana

1,863

471

34

612

49

Guatemala

1,131

15

87

724

- 37

- 5

73

11

Honduras
Hongkong

300

- 191

- 39

- 502

- 63

2,694

1,795

200

1,547

135

32,819

19,070

139

17,321

112

Indonesia

7,820

1,562

25

1,140

17

Iran

3,000

- 578

- 16

- 777

- 21
- 19

Hungary
India

Israel

904

- 82

- 8

- 212

Jordan

880

516

142

466

113

Kazakhstan

718

- 201

- 22

- 365

- 34

Kenya

1,773

803

83

664

60

S. K o r e a

4,000

830

26

111

K y r g y z . Rep.

174

- 710

- 80

- 562

- 76

Latvia

200

- 388

- 66

- 302

- 60

Lesotho ('92)

145

- 2,103

- 94

- 3,331

- 96

Madagascar ('91)

565

- 555

- 50

- 332

- 37

Malawi ('92)

587

82

16

44

2,940

1,081

58

1,027

54

Malaysia ('92)
Mauritius

248

- 9

- 4

- 61

- 33

3,533

- 1,385

- 28

- 2,020

- 36

Moldova

280

- 83

- 23

- 152

- 35

Morocco

2,470

1,424

136

1,162

89

602

- 522

- 46

- 232

- 28

Mexico

Mozambique
Namibia
Nepal
Nicaragua
Nigeria
Oman ('92)
Pakistan
Panama

147

- 81

- 36

- 80

- 35

2,800

2,070

284

1,986

244

624

- 7

- 1

117

23

9,828

5,564

130

5,597

132

353

91

35

49

11,783

7,343

165

7,256

160

.16

20

- 274

- 93

- 320

- 94

234

- 124

- 35

- 145

- 38

Paraguay

1,290

494

62

602

87

Peru

1,267

- 659

- 34

- 514

- 29

Philippines

5,724

2,441

74

2,292

67

179

- 42

- 19

- 55

- 24

Papua New Guinea

Quatar
Romania

850

- 1,983

- 70

1,849

- 69

40,800

27,761

213

27,666

211

Rwanda

480

71

17

24

Sierra Leone

610

29

159

35

R u s s i a n Fed.

Slovenia

363

- 168

- 32

- 164

- 31

South Africa

2,000

- 958

- 32

- 1,102

- 36

Sri L a n k a

2,313

874

61

936

68

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R. Vaubel / European Journal of Political Economy 13 (1997) 201-224

Table 3 (continued)
Country

Tanzania
Thailand
Trinidad+ Tobago
Tunesia
Turkey
Uganda
Uruguay
Venezuela
W. AfricanStates
W. Samoa
Zimbabwe
a

Actual

Deviationfrom numberpredicted by

numbers

Eq. (2)

1,700
5,033
542
1,200
7,720
1,776
540
2,000
627
69
1,000

Eq. (4)

persons

percent

persons

percent

822
3,273
172
95
4,156
405
- 145
- 49
- 962
23
410

94
186
46
9
117
30
- 21
- 2
- 61
50
69

784
2,584
187
151
3,877
613
- 87
- 65
- 1,247
21
343

86
106
53
14
101
53
- 14
- 3
- 67
44
52

Unless indicatedotherwise.

demand for labor is very low (which seems plausible). The following equation is
estimated:
In L = In b o + b I In M + b 2 In N + b 3 In A + b4S In M + bsS In N
+ b 6 S l n A + b 7 C l n M + b s C l n N + b 9 C l n A + blo In I
+ bjl In E + b12 In Y + v
where L is the staff of the central bank, M is the money supply M 1 converted to
US dollars, N is the country's population (in millions), A is the geographic area
of the country, S takes the value 1 if the central bank alone is responsible for
commercial bank supervision, 0.5 if it shares this responsibility with some other
institution, and 0 if it does not supervise the banking system at all, C takes the
value 1 for central banks of former Comecon members and zero otherwise, I is an
index of central bank independence, E is a shift dummy that takes the value
2 . 7 2 . . . (i.e., In E = 1) if the exchange rate is pegged and 1 (i.e., In E = 0)
otherwise, and Y is GNP (or GDP) per capita converted to US dollars.
The first nine variables are proxies for central bank output. Central banks
produce three types of output: the monetary base, supervision of the banking
system and commercial banking services. The provision of the monetary base has
a population and an area dimension: output has to be measured not only in terms
of the quantity of central bank money but also in terms of population size ( N ) and
the currency area (A). Since commensurable data for the monetary base are not
available for a sufficient number of countries, the money supply ( M ) will be used
as a proxy. To capture the interaction between M, N and A, all three are specified

R. Vaubel / European Journal of Political Economy 13 (1997) 201-224

209

in logarithms. Since the dependent variable is a logarithm as well, constant

elasticities are estimated.
In several countries, the central bank is also in charge of banking supervision
and regulation. In the transforming countries, central banks have even performed
commercial banking functions. These types of central bank output have a population and area dimension as well. These additional functions are captured by the
slope dummies S and C.
The last three variables reflect the degree of central bank independence (I), the
exchange-rate regime (E) and the cost of bureaucratic control which is a function
of per capita income (Y). (Arguably, income may also reflect other factors, for
instance a higher demand for central bank information, i.e. output). Since these
variables explain the ratio between actual staff and the staff accounted for by
central bank output, they have to be expressed in logarithms as well.
Table 4 reports the results for various indices or proxies of central bank
independence and different samples. The complete sample and the classification of
countries is listed in Table 3. Since the proxy for banking supervision always took
a negative regression coefficient (which cannot be reconciled with any reasonable
theory), it has been excluded from the regressions. Comparable statistics of M 1
are available for 19 industrial countries. This explains the omission of M and
C In M in the larger samples.
Five different indices or proxies of central bank independence are used:
(i) an unweighted average of six overall indices which has been computed by
Masciandaro and Spinelli (1994) 7: Eqs. (1)-(4),
(ii) Cukierman's index of legal independence (Cukierman, 1992, p. 381, Table
19.3): Eqs. (5)-(7),
(iii) the turnover rate of central bank governors (Cukierman, 1992, p. 384,
Table 19.5): Eqs. (8)-(10),
(iv) Cukierman's index of the budgetary independence of central banks
(Cukierman, 1992, p. 414, Appendix C): Eq. (11), and
(v) Cukierman's index of central bank independence with respect to the salaries
of high central bank officials and the allocation of profits (Cukierman, 1992, p.
414, Appendix C): Eq. (12).
The only variable which takes a significant regression coefficient in all twelve
equations is the size of the population. The regression coefficients of the other
output variables are always insignificant. The regression coefficient of per capita
income is significantly positive (at least at the 10% level) whenever the sample
combines industrial and developing countries. Apparently, a high per capita

7 It is an averageof the indices calculatedby Banaianet al. (1983), Bade and Parkin(1985), Alesina
and Summers (1993), Burdekin and Willett (1990), Grilli et al. (1991), Cukierman (1992) and
Eijffingerand Schaling(1993).

4.32 (3.19 a)
0.70 (6.10 a)
-0.20(
0.62)

0.35 ( - 0 . 6 4 )
0.11 (0.85)
0.71
0.66

(8)
ICs
n = 19

9.35 (2.42 b)
0.82 (8.77 a)
-0.19 (-0.56)

0.35 (1.08)
- 0 . 4 4 ( - 1.02)
0.87
0.83

Explanatory variables

Intercept
Population (In N)
Tumover rate of governors (ln l )
Budgetary independence (In l )
Salary independence (In I)
Pegging (In E)
Inzcome per capita (In Y)
R
R2

(9)
LDCs
n=26

8.95 (2.51 b)
NA
0.93 (9.07 a)
WS
NR
NR
0.10 (0.25)
0.21 (0.79)
- 0.39 ( - 1.10)
0.84
0.80

9.52 (2.00 c)
5.90 (0.01)
0.93 (2.25 b)
WS
NR
NR
0.13 (0.24)
0.10(0.24)
- 0.45 ( - 0.62)
0.85
0.80

Intercept
Money supply (In M 1)
Population (In N)
Area (In A)
C In N (Comecon)
C In A (Comecon)
Central bank independence (In I)
Pegging ( l n E )
Income per capita (In Y)
R
R2

(2)
ICs
n=21

(1)
ICs
n = 19

Explanatory
variables

Table 4
Central bank staff, international cross-section analysis, 1991 1993

0.058 (0.24)
0.13 (1.83 c)
0.76
0.74

4.11 (6.28 a)
0.73 (10.61 a)
-0.15 (-0.76)

(10)
all
n=45

4.86 (6.60 a)
NA
0.56 (6.29 a)
0.03 (0.49)
0.13 (1.03)
WS
NA
- 0 . 6 7 ( - 3 . 1 2 a)
0.11 (1.24)
0.68
0.66

(3)
LDCs
n=74

0.28 (1.01)
0.17 (2.53 b)
0.86
0.83

0.60 (1.32)

3.59 (4.59 a)
0.76 (9.01 a)

(1 l)
all
n = 19

4.25 (9.11 a)
NA
0.65 (12.38 a)
WS
0.12 (0.99)
WS
NA
- 0 . 4 2 ( - 2 . 3 4 b)
0.18 (3.44 a)
0.70
0.68

(4)
all
n=97

0.67 (2.84 b)
0.19 (0.81)
0.13 (2.31 b)
0.90
0.88

4.07 (7.43 a)
0.73 (10.35 a)

(12)
all
n = 19

9.55 (2.93 a)
NA
0.81 (9.51 a)
WS
NR
NR
- 0 . 0 2 7 ( - 0.09 )
0.26 (0.94)
- 0.42 ( - 1.26)
0.86
0.82

(5)
ICs
n=22
6.05 (5.96 a)
NA
0.60 (7.40 a)
WS
WS
0.006 (0.05)
0.51 (1.20)
-0.12 (-0.39)
0.032 (0.28)
0.73
0.69

(6)
LDCs
n=39

5.02 (8.14 a)
NA
0.66 (11.74 a)
WS
WS
WS
0.28 (1.08)
0.032 (0.15)
0.11 (1.92 c)
0.75
0.73

(7)
all
n=61

~c~

.~

~"

I,O

R. Vaubel/ European Journal of Political Economy 13 (1997) 201-224

211

income raises the opportunity cost of bureaucratic control or the demand for
central bank output (e.g., information). The dummy for exchange-rate pegging
does not take a significant regression coefficient except in Eqs. (3) and (4) which
include the developing countries. The effect is negative in all samples confined to
developing countries (Eqs. (3), (6) and (9)) but positive in all samples confined to
the industrial countries (Eqs. (1), (2), (5) and (8)). Thus, there is weak evidence
that exchange-rate pegging economizes on central bank staff in developing countries.
Except in Eq. (5), central bank independence raises the size of central bank
staff s. But this effect is not significant (at the five percent level) unless in Eq.
(12) the index is narrowed down to the central bank's independence with respect
to the salaries of high officials and the allocation of profits. Of course, this does
not imply that the central bank's demand for staff is wage elastic. Probably, it
simply indicates that central banks which are independent with respect to salaries
and profit allocation are typically also independent in their hiring decisions. There
is a significant positive correlation between 'legal' independence and salary
independence (r = 0.45) but there are also some central banks which enjoy
above-average 'legal' independence but little salary independence (Tanzania,
Ethiopia, Ireland) or which enjoy complete salary independence but little 'legal'
independence (Belgium, Italy, Nepal and France). Thus, in principle, it is possible
to have a central bank that is highly independent with respect to monetary policy
but tightly controlled with respect to personnel.
Eqs. (2)-(4) have been used to predict central bank staff for each country and
to compare fitted and actual numbers. Since E and - - where possible - - I are
included in these regressions, we are here not interested in possible savings or

8 Note that, in Eqs. (8)-(10), a high turnover rate stands for low independence. Thus, we expect a
negative sign.
Notes to Table 4:
Data sources:
- Central bank staff, sources of Table 1, Table 2 and Morgan Stanley Central Bank Directory, 1994;
for the U.S. Federal Reserve System: all federal reserve banks combined (1992) plus most recently
published data for the Board of Governors (1985).
- Money supply ( M 1) and exchange rate regime: International Monetary Fund, International Financial
Statistics,
- Central bank responsibility for banking supervision: Masciandaro and Spinelli (1994), Table 3,
column 7.
- Population, area, income per head: World Bank, World Development Report, 1993.
Notes: WS: If this variable were included, its regression coefficient would take a sign that is
incompatible with the underlying hypothesis ('wrong sign'); NR: not relevant for sample at hand; NA:
data are not available for all countries included in the sample.
a Significant at the 1% level.
b Significant at the 5% level.
c Significant at the 10% level, t-statistics in parentheses.

212

R. Vaubel/ EuropeanJournal of Political Economy 13 (1997) 201-224

inefficiencies due to the exchange-rate regime or central bank independence. Both

are taken as given and possibly justified on grounds not relating to staff size. The
results are reported in Table 3. A positive deviation indicates X-inefficiency
(shedding or excessive use of labor-intensive technologies such as rediscounting)
or unusual tasks (which would have to be demonstrated). Among the industrial
countries (Eq. (2)), France (130%), Norway (126%), Belgium/Luxembourg (97 %)
and Germany (91%) have the most overstaffed central banks (the percentages
measure the excess of staff divided by the fitted values from Eq. (2)). By the same
measure, central bank staff is relatively small in Japan, New Zealand and Spain
(all - 4 7 % ) as well as Canada ( - 4 0 % ) . In the developing or transforming
countries (Eq. (3)), the central banks of Nepal (284%), the Russian Federation
(213%) and Hungary (200%) suffer most from overstaffing, while Lesotho
( - 9 4 % ) , Panama ( - 9 3 % ) and China ( - 8 7 % ) exhibit the largest negative
deviations from predicted values. If the regression is estimated for the largest
possible sample of 97 industrial, developing or transforming countries (Eq. (4)),
the quantitative estimates change considerably for some of the industrial countries
but the high ranks of France, Belgium/Luxembourg and Germany remain unchanged among the countries showing positive deviations, and New Zealand,
Canada and Japan remain among the four countries exhibiting the largest negative
deviations.
2.3. A time-series analysis for the staff of the German Bundesbank

The international comparison of Sections 2.1 and 2.2 suggests that the Bundesbank is one of those central banks which suffer severely from bureaucratic waste.
This may be due to excess output, an inefficient production technology or labor
hoarding. To identify the causes, its labor demand function ought to be estimated
from a time series analysis which includes additional explanatory variables.
The staff size of the entire Bundesbank ( N B) and of its Direktorium ( N o) have
each been regressed on the following explanatory variables:
central bank output (qB or qD, respectively) as approximated by the number
of its payment transactions,
- the average salary of a Bundesbank official in real terms (W) approximated
by an index of salaries in the federal administration,
- the number of working hours per employee in the public sector (h),
the Bundesbank's revenue (R) in real terms,
the Bundesbank's net foreign position ( F ) in real terms as a wealth
variable 9,
-

9 Note that a bureaucracy'slabor demand function is the combinationof a consumptionfunction and

a transformation of its production function. If wealth increases, the central bank council wishes to
increase its consumption in terms of staff. Both wealth and staff contribute to the central bank's
prestige.

R. Vaubel/ European Journal of Political Economy 13 (1997) 201-224

213

a dummy for the new Bundesbank building (DB = 1 from 1972 onward) and
- dummies for the terms of office of the Bundesbank presidents Klasen
(DK = 1 in 1970-1976), Emminger (DE = 1 in 1977-1979) and Ptihl (DP = 1 in
1980-1989).
The expected signs of the regression coefficients are positive for q, R and F,
negative for W and h and ambiguous for the dummies. The dependent variable
refers to the end of each year so that the annual flow variables (q, W, h, R) are
supposed to affect staff size with an average lag of half a year.
The regressions have been estimated for the period 1957-1989 because comparable data for q are lacking for the Bundesbank's predecessor and because the
Bundesbank has not published the size of its West German staff since Germany's
monetary unification in mid-1990. Initially, all explanatory variables have been
included. Subsequently, variables with clearly insignificant coefficients were
omitted in a stepwise procedure (starting with the lowest absolute t-statistics). The
elimination of variables did not have a major effect on the coefficients of the
remaining variables. Where necessary, the Cochrane-Orcutt transformation has
been used to correct for significant first-order autocorrelation of the residuals.
The equations for N D and N B have been estimated for levels, first differences
(AN), natural logarithms and rates of change. Since most of the variables are
non-stationary in their levels and logarithms, Engle/Granger tests for integration
and cointegration have been performed. In all cases, the Augmented Dickey Fuller
test was required. The ADF-statistics are given in brackets (following the t-statistics) for integration and in a separate column (with the number of lags in
parentheses) for cointegration.
The results in Table 5 are consistent with the hypothesis that Bundesbank
revenue exerts a significantly positive effect on the size of the Direktorium's staff
(Eqs. (2), (3)). The variables of Eq. (1) are not cointegrated but Eq. (2) passes the
ADF test for both integration and cointegration. It shows that, in addition to
revenue, the output proxy and the dummies have significantly positive effects on
staff size 10. The significantly positive effect of central bank revenue is also
present in Eq. (3) which is estimated from first differences. Similar results have
been reported by Boyes et al. (1988) for the staff of the Federal Reserve Board.
Eq. (4) which concerns the personnel of the entire Bundesbank is marred by
first-order autocorrelation of the residuals (even after transformation); moreover,
the tests for integration of In R and for cointegration are not passed except at the
10% level.
In Eq. (2) the regression coefficient of Bundesbank revenue is equal to 0.006.
-

10 If W is included in this regression, it takes a significantly positive coefficient (t = 1.79) and the
t-statistic of R drops to 1.66. However, there is no theory predicting that the Direktorium of the
Bundesbank would employ more personnel because public sector salaries have increased. Nor is it
plausible to assume that the Bundesbank's demand for labor raises real wages in the public sector.

214

R. Vaubel / European Journal of Political Economy 13 (1997) 201-224

Table 5
Personnel of the German Bundesbank (NB) and its Direktorium (ND), 1958-89
Eq.

Dependent
variable

Constant

R (In, A)

F (In)

q (In)

(1)

In ND [-0.31]

6.09 (24.90 a)

0.029 (1.76 c)
[--1.48]

(2)

ND [ - 0.19]

1944 (89.97 a)

0.086 (6.39 a)
[--0.11]
0.00011 (5.19 a)
[+2.281

(3)
(4)

A ND
In NB [-0.81]

25 (2.43 b)
8.23 (21.51 ~)

0.014 (1.83 c)
[ - 1.77 c]
0.006 (2.39 b)
[-- 1.19]
0.004 (2.42 b)
0.018 (1.73 c)
[ - 1.77 c]

0.072 (2.45 b)
[--0.33]

Data sources: F: Deutsche Bundesbank, Monatsbericht; h: Statistisches Bundesamt, Fachserie 16, Reihe
4.3.; qB: number of credit and debit transactions at current accounts with the Bundesbank plus number
of checks cashed or confirmed by the Bundesbank plus number of settlements between state central
banks and Direktorium: Deutsche Bundesbank, Gesch~iftsbericht; qD: number of credit and debit
transactions at current accounts with the Bundesbank Direktorium plus number of checks cashed with
the Direktorium: Deutsche Bundesbank, Gesch~iftsbericht;R: Deutsche Bundesbank, Gesch~iftsbericht;
W: Statistisches Bundesamt, Fachserie 16, Reihe 4.3., and Fachserie 14, Reihe 6. All nominal variables
have been deflated with the Consumer Price Index (Deutsche Bundesbank, Monatsberich0.
Note: t-statistics in parentheses (two-tailed test). ADF-statistics for integration in brackets.
a Significant at the 1% level.
b Significant at the 5% level.
c Significant at the 10% level (ADF only).

This implies that if the B u n d e s b a n k had not earned any revenue in the terminal
year of 1989, its Direktorium would have e m p l o y e d 70 persons (or 2.5%) less.

3. Non-parametric tests for a political monetary policy cycle

For G e r m a n y , the hypothesis of a political m o n e t a r y policy cycle has been
tested and accepted by Frey and Schneider (1981), Soh (1986, Table 5) and
A l e s i n a et al. (1992, Tables 8.8 and 8.9). While Soh simply compared the average
monetary expansion rate in pre- and post-election periods, Frey and Schneider
have demonstrated that the m i n i m u m reserve ratio, the discount rate, the l o m b a r d
rate and central b a n k credit to the g o v e r n m e n t vary in line with fiscal policy if
there is a conflict b e t w e e n monetary policy (as measured by free reserves) and
fiscal policy (as measured by the deviation from a cyclically adjusted budget).
A l e s i n a et al. find evidence that the expansion rate of G e r m a n M 1 is higher prior
to federal elections (especially under ' r i g h t - w i n g ' governments) but the reported
regression coefficients are marginally insignificant. N o n e of these studies allows
for the possibility that the g o v e r n m e n t m a y not have a political majority in the
central b a n k council and that the council m a y prefer the g o v e r n m e n t to lose the

215

R. Vaubel/European Journal of Political Economy 13 (1997) 201-224

DB

DK

DE

0.064 (3.65 *)
135 (2.50 a)

DP

R2

ADF (lags) D.W. p

0.039 (2.08 b) 0.99 -3.02 (2)

2.09

168 (2.24 b)

0.99 -4.19 c (1)

1.67 0.42

0.33
0.98 --4.06 (1)

1.95
1.12

190 (5.07 a)

100(2.74a)

74 (2.16 b)
0.045 (1.91 c)

0.054(2.37 b) 0.041 (1.19) 0.063(1.55)

0.53

0.40
0.77

election. After all, the federal government appoints only a minority of the council
members, the appointments are staggered, and a full term of office lasts eight
years. Twice in the past (1966, 1982), a federal government had to resign in a
severe recession that was mainly due to the Bundesbank's restrictive monetary
policies.
The following analysis is based on an explicit investigation of the political
majorities in the Bundesbank council, and it uses (seasonnally adjusted) M 1 as an
indicator of monetary policy because the latter has been found to have the
strongest impact on the German business cycle (e.g., Scheide, 1984; von Hagen,
1984).
Those council members who are nominated by the individual state governments
are assumed to be sympathetic to the dominant party of the state government that
first appointed them 11. With one indubitable exception 12, they have been classified according to this rule. As for the remaining council members, a panel of five
'intimate' Bundesbank experts (three academics and two leading bankers) has
been consulted in separate interviews 13
Table 6 presents the results for the end of each year. The letter C indicates a
preference for the Christian Democratic Party, an S a preference for the Social
Democratic Party. A slash denotes a sympathizer of the Free Democratic Party

11 For the United States, several studies suggest that the appointment process generates partisan
effects on monetary policy (Chappell et al., 1993; Havrilesky and Gildea, 1991, 1992; Havrilesky,
1995, pp. 183ff and Table 9.3). However, none of these studies tries to identify partisan majorities in
the Federal Open Market Committee.
12This is Heinrich Irmler who was first nominated by a three-party state governmentled by the
Social Democrats and subsequentlyby a federal governmentled by the ChristianDemocrats.
13No contradictoryreplies were obtained.If some respondentsdid not know the answer, while others
said they did, the latter's classificationwas used.

R. Vaubel / European Journal of Political Economy 13 (1997) 201-224

216

Table 6
The political composition of the German central bank council. 1 9 5 0 - 1 9 9 0

05/31/50
51
04/30/52
53
54
55
56
57
04/01/58
59
12/31/59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94

Baden
(-Wiirtt.)

Bavaria

Bremen

C
C
C
C'
C'
C'
C'
C'
C'
C'
C'
C'
C'
C'
C'
C'
C'
C'
C'
C'
C'
C'
C'
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C

C
C
C
C
C
C
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C

S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S

Bremen,
Lower
Saxony,
Saxonyanhalt

Hamburg

Hamburg,
Mecklenburg-V.
Schleswig
-Holstein

S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
C
C
C

(S)
S
S

Hesse

Lower
Saxony

C
C
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
C'
C'
S
S
S

?
S
S
S
S
S
S
S
S
S
S
S
S
C
C
S
S
S
S
S
S
S
S
S
S
S
S
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C
C

Sources: Gesch~iftsberichte, B a n k deutscher L~inder and Deutsche Bundesbank; interviews.

Bank deutscher L~inder, Gesch~ftsbericht, Deutsche Bundesbank, Gesch~iftsbericht. Election dates and results: Benz (1989)

with leanings towards the Christian (C') or the Social Democratic Party (S'). A
question mark means that the council member could not be classified. At the time
of the first appointment, the respective symbol is cursive, bold print indicates a

R. Vaubel/ European Journal of Political Economy 13 (1997) 201-224

NorthRhine-W.

RhinelandPalat. (Saar)

Schleswig-H,

Wiirttemberg-B,

Wiirtt.
and Hz.

Berlin

C'

--

--

'~

S
S
S

C'
C'

?
?

---

---

C
C

'~

Berlin,
Brandenburg

Saar

Saxony,
Thiiringen

President
CBC

217

President
Dir.

VicePres.
Dir.

lI

C
C

N
N

'~

--

--

--

--

--

--

'?

--

--

C'

--

--

C'

--

--

--

C'

--

--

--

C'

--

--

--

C'

--

--

--

C'

--

--

--

C'

--

--

--

C'

--

--

C'

--

--

--

C'

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

--

C
C
C

C
C
C

S
S
S

S
S
S

--

-C
C

reappointment. The letter N stands for members of the Direktorium who were not
members of the central bank council (until 1957). The three fight-hand columns
summarize the political balance in the council. In the following, a distinction
between 'safe' and 'unsafe' majorities will be drawn. An unsafe majority presup-

R. Vaubel/ European Journal of Political Economy 13 (1997) 201-224

218
Table 6 ( c o n t i n u e d )

Direktorium

Total

CDU

SPD

13
13

6
6

3
4

4
3

13

I1

--

11

--

11

N
N

--

11
11

3
3

7
7

1
1

C
C

?
?

?
?

19
19

6
6

8
8

5
5

111

IV

VI

VII

VII1

IX

51

N
N

N
N

N
N

N
N

N
N

--

--

53

--

54

55

56
57

N
N

N
N

N
N

N
N

N
N

59

C
C

C
C

?
?

C
C

05/31/50
04/30/52

04/01/58
12/31/59

20

60

20

61

20

62

20

10

63

20

10

64
65

C
C

C
C

?
C

C
C

C
C

C
?

20
19

10
11

8
8

2
1

66
67

C
C

C
C

?
C

C
C

C'
C'

C
C

?
?

20
20

10
11

8
8

2
1

68
69
70
71

C
C
C
C

C
C
C
C

C
C
C
C

C
C
C'
CI

C'
C'
C
C

C
C
?
?

?
?
---

20
20
19
19

11
11
10
10

8
8
8
8

1
1
1
1

72

C'

--

19

11

73

S'

C'

--

19

10

74
75
76

S'
S'
S'

C
C
S

C
S
C

S
C'
S

C'
C
C'

C
C
C

C
--

20
19
19

10
9
9

10
10
10

0
0
0

77

S'

C' C

19

10

78
79

S'
S'

S
S

C
S

S
C'

C'
?

--

19
18

9
8

9
9

80

S'

--

--

17

81

S~

--

17

82
83
84

C'
C'
C'

S
S
S

S
S
S

?
?
?

--

--

---

17
17
17

8
8
8

8
8
8

1
1
1

85
86

C'
CI

S
S

S
S

?
?

--

---

--

17
17

8
8

8
8

1
1

87
88
89
90

C
C
C
C

S
S
S
C

S
S
S
Ct

C'
C'
C'
C

?
?
?
?

--

18
18
18
18

9
9
9
11

8
8
8
6

1
1
1
I

91
92
93
94

C
C
?
C'

C'
C
C
?

C
?
S
C

C
C
S

-C'
C'
C

---

16
15
16
16

10
9
9
9

6
5
6
6

0
1
1
1

--

----

--

----

1
1

poses that the non-classifiable members abstain; a safe majority is independent of

how the non-classifiable members vote.
Table 6 reveals that, at times, the federal government faced a safe majority of
the opposition party in the Bundesbank council (1956/1957, 1969-1974,
1977/1978). In addition, there were periods with unsafe opposition majorities
(1957-1960, 1982-1985) and stalemates (1952-1956, 1960/1961, 1974/1975,
1978/1979). Two federal chancellors who were confronted with an opposition

R. Vaubel/ European Journal of Political Economy 13 (1997) 201-224

219

majority in the central bank council have altered the German monetary constitution in their favor - - probably for this reason 14
The results of Table 6 provide the basis for our tests of whether monetary
expansion (M1) depends on the party orientation of the federal government, the
political majority in the Bundesbank council and the proximity of the next federal
election. To smooth out short-term fluctuations in the (seasonally adjusted) money
supply series, averages of three end-of-month observations have been computed
for the beginning and end of each period where possible. For periods shorter than
half a year, the rates of monetary expansion have been calculated from the initial
to the terminal month; these figures are given in parenthesis. For all periods,
monetary expansion is reported as a compound annual rate of change. Because of
the lagged effect of unexpected monetary policy, the pre-election period is defined
to begin 15 months prior to the three months that precede the federal election.
Two election dates (1972, 1983) were advanced at short notice; they have been
ignored in all tests of political monetary-policy cycles. Moreover, the election of
1969 has been omitted in testing for partisan cycles because the incumbent
government was a grand coalition.
In 1987, a few months after the federal election of January 1987, the federal
government reappointed a president of the Bundesbank who is a member of the
opposition party. In the following analysis, he is classified as friendly to the
government up to the date of his reappointment 15
The resulting political regimes and monetary expansion rates are reported in
Table 7. To avoid debatable estimates of money demand for the various periods,
the analysis is confined to non-parametric tests for a binomial distribution. Five
hypotheses are examined. For each hypothesis, the years in which the relevant
regime changed are classified according to whether the outcome was consistent
(Yes) or inconsistent (No) with the hypothesis. Regime changes lasting less than
six months are set in parentheses.

Hypothesis 1. During a pre-election period, monetary expansion is faster than

during the preceding post-election period ('dependency or opportunist
hypothesis').
14 In 1952, the year in which he lost his unsafe majority in the central bank council, Adenauer began
to press for a change in the central bank law. From February 1956 onward, he even faced an opposition
majority in the council. In 1957, parliament finally passed the Bundesbank Law which, for the first
time, enabled the federal government to nominate members of the central bank council. In early 1978,
Chancellor Schmidt started his initiative for the establishment of the European Monetary System
(1979) which initially prevented the Bundesbank from following a more restrictive monetary course
(Vaubel, 1980). In February 1977, the federal government's majority in the council had been turned
into a minority. Schmidt did not regain his safe majority before the beginning of 1980, an election year.
15 The results of Ersenkal et al. (1985, Table 2) show that the U.S. monetary base has expanded
significantly faster during the twelve months which precede the decision about the reappointment of an
FRB chairman (provided that he has been eligible for reappointment and has not indicated he was not
seeking reappointment and provided that no presidential dummies are added).

R. Vaubel / European Journal of Political Economy 13 (1997) 201-224

220

Table 7
Rates of monetary expansion ( M 1 ) per annum in pre- and post election periods and by partisan majority in the central bank
council ( CBC)
Date of
federal
election

New

Monetary expansion

Date of

New

Monetary expansion by C B C regime

government

pre-

post-

change

political

total

pre-

post-

led by

election

election

of C B C
majority

regime
at C B C

period

election

election

1948

CDU?

14.8 ~

20.5 a

08/14/49

CDU

20.5 a

11.7
03/01/52
01/01/53
01/29/53

tie'?
SPD?
tie'?

15.7
(-41.5)
12.4

15.7
(-41.5)
17.9

02/01/56

SPD

9.7

08/01/57

SPD?

10.8

-9.3
(31.4)

__
12,1
---12,6
(13.0)

04/01/60
06/16/61

tie'?
CDU?

6.7
9.0

6.7
(17.8)

08/15/65

CDU

2.7

9.1
--

09/06/53

09/15/57

09/17/61

09/19/65
12/01/66
09/28/69
(11/19/72)

10/03/76

CDU

CDU

CDU

CDU
CDU/SPD
8PD
SPD

SPD

11.8

10.0

9.6

10.2

10.7

8.6

8.8

4.6

8.6
15.5

10.3
7.2

I 1.0

10/05/80
10/01/82
(03/06/83)

SPD
CDU
CDU

2.6

01/25/87

CDU

9.3

CDU
CDU

15.7
(-41.5)
11.7
9.7
12.8
6.7
9.0

3.8

7.9
8.5
10/01/74
04/01/75

tie
SPD

12.9
9.3

-11.0

o2/ol/77
03/01/78

CDU
tie?

13.1
7.6

10/01/79
01/01/80

SPD?
SPD

(6.1)
3.3

--1.8
(6.1)
6.8

10/01/82

tie?

5.2

--

07/01/85

CDU

9.4

9,3

10.7

3.2
3.9

5.3
9.6

9.8 a

7.7

8.2
12/01/87
05/01/89
10/01/89
01/01/90
02/21/90

12/02/90
10/16/94

-10.7
--8.6

first
two
years
(max.)

CDU?
SPD?
tie'?
CDU?
CDU

9.2
5.5
(9.4)
(2.9)
6.9

-5.5
(9.4)
(-2.9)
6.2

12.9
-(5.5)
13.1
9.0
-1.2
-3.3

12.9
9.3
13.l
7.6
(6.1)
2.2
6.2
9.6

10.8
9.2
--

6.8

9.2
5.5
(9.4)
(2.9)
4.3

6.8
9.6

Money supply ( M 1 ) : 1948-1953: Bank deutscher L~inder, Monatsbericht (not seasonally adjusted); 1954-1960: Deutsche
Bundesbank, Monatsbericht, 1971 ft. (not seasonally adjusted); 1961-1994: lnstitut ftir Weltwirtschaft, Kiel (seasonally
adjusted, Census X I 2 W ) , Elections: Benz (1989) and Statistisches Jahrbuch der Bundesrepublik Deutschland
a F r o m December 1948 onward.
? - Assumption: non-classifiable CBC members abstain, figures in parenthesis: calculated from initial and terminal month
only, election dates in parenthesis: election d a ~ has been advanced.

Yes: 53, 65, 69, 76, 87, 94;

Y'. = 6
No: 57, 61, 80, 90;
Y~ = 4
Like Soh (1986) and Alesina et al. (1992), we find that the results favor the

R. Vaubel/ European Journal of Political Economy 13 (1997)201-224

221

hypothesis but they are not statistically significant. Moreover, the m o n e t a r y

acceleration before the elections of 1953 and 1965 is minute.

Hypothesis 2. If the political regime at the Bundesbank council changes in favor

of the federal government, monetary expansion accelerates; if the regime change
is unfavorable to the government, monetary expansion decelerates.
Yes: (53), 53, 56, 57, 61, 74, 85, 87, 89, (89), 90;
E = 11
No: 52, 60, 65, 75, 77, 78, (79), 80, 82, (90);
E = 10
O n c e more, the result is not significant. The same is true if the distinction
b e t w e e n 'safe' and ' u n s a f e ' majorities is abandoned.

Hypothesis 3. If the federal government has a political majority in the Bundesbank council at the beginning of the pre-election period or if the political regime
at the council changes in favor of the government during the pre-election period,
monetary expansion accelerates; it decelerates if the opposite is the case ('party
preference hypothesis').
Yes: (53), 53, 56, (57), (61), 65, (79), 80, 85, 89, (89) 90, 94;
E = 13
No: 75, (90);
E = 2
The alternative hypothesis can be rejected at the 1% level. If 'safe' and
' u n s a f e ' majorities are not distinguished within the g o v e r n m e n t ' s term of office,
the n u m b e r of observations drops to 12 but the resulting Y e s / N o ratio of 10:2 is
still significant at the 2% level.
In view of the importance of this outcome, a sensitivity analysis has b e e n
conducted. For this purpose, three more (former) presidents of state central banks
have been treated as possible exceptions to the a b o v e - m e n t i o n e d rule, i.e., they
have b e e n reclassified as neutral, either individually or in combination. Moreover,
all periods that are shorter than half a year have b e e n omitted. In some cases, the
loss of observations leads to insignificance at c o n v e n t i o n a l levels but far more
observations are consistent with the hypothesis than not 16

16 In two subsequent papers (Lohmann, 1994, Berger and Woitek, 1995), which have been inspired
by the first version of this section, regression analysis has been used to test for the party preference
hypothesis. Lohmann's regression which includes ten explanatory variables yields the expected positive
effect but the regression coefficient is not significant. However, her analysis suffers from at least three
serious weaknesses: (i) Her dependent variable is not the growth rate of M 1 but of central bank money.
Central bank money in the definition of the Bundesbank consists of the components of M3 but with
different weights. It is a much poorer predictor of the business cycle than M 1. (ii) Since the analysis is
based on quarterly data, the regime changes at the Bundesbank are imprecisely measured. (iii) Several
other explanatory variables included in the regression take signs which are inconsistent with any
reasonable theoretical hypothesis. Berger and Woitek have conducted a Granger-type test introducing
one explanatory variable at a time. The party preference variable does not take a significant regression
coefficient. For a critique of their methodology see my rejoinder in this volume.

222

R. Vaubel / European Journal of Political Economy 13 (1997) 201-224

In the meantime, the party-preference hypothesis has also been tested, and
found supported, for the Federal Open Market Committee in the United States
(McGregor, 1996) 17

Hypothesis 4. If the political regime at the Bundesbank council changes in favor

of the Christian Democrats, monetary expansion decelerates; if it changes in favor
of the Social Democrats, monetary expansion accelerates ('partisan theory') 18
Yes: 52, 60, 65, 74, (90);
Y; = 5
No: (53), 53, 56, 57, 61, 75, 77, 78, (79), 80, 82, 85, 87, 89, (89), 90; E = 16
The alternative hypothesis cannot be rejected. The same is true if the distinction
between 'safe' and 'unsafe' majorities is given up.

Hypothesis 5. Up to two years after a Bundesbank regime has changed in favor

of the Christian Democrats, the money supply grows more slowly than during the
first two years of the preceding Bundesbank regime; if the regime change at the
Bundesbank is unfavorable to the Christian Democrats, the opposite is the case
('short-run partisan theory') 19
Yes: 52, 60, 65, 74, (90);
E = 5
No: (53), 53, 56, 57, 61, 75, 77, 78, (79), 80, 82, 85, 87, 89, (89), 90; E = 16
This is identical with the results for Hypothesis 4, and the same is true if 'safe'
and 'unsafe' majorities are not distinguished.
Only the 'party preference hypothesis' (3) is supported by the evidence. The
members of the Bundesbank council, like most ordinary citizens, seem to derive
utility from the election of their preferred party. If they are independent and if they
are not rewarded for stable monetary growth nor punished for monetary policy
cycles, they use their power to improve the electoral chances of their preferred
party. As this has not previously been demonstrated, our result is consistent with
rational expectations on the part of both the public and the Bundesbank council.
The central bank and the political parties preferred by it have an interest in
maintaining the appearance of central bank neutrality because a central bank that

17 McGregor estimates reaction functions for the dissenting votes of individual FOMC members. Like
Lohmann (1994), he includes an interaction variable which is the product of a dummy for pre-election
periods and a dummy indicating whether the FOMC member has been appointed by the party of the
incumbent president. The regression coefficients of this variable always take the expected sign and are
almost always significant.
18 The partisan theory is due to Hibbs (1977). Its implications under rational expectations have been
spelled out by Chappell and Keech (1986) and Alesina and Sachs (1988). The partisan theory has been
confirmed by Gildea (1990, Table 14.1-2.) for the U.S. Federal Open Market Committee.
19 This theory has been suggested by Alt (1985) and considered by Alesina (1989, p. 72). The idea is
that left-wing governments (or central bank councils) turn to less expansionary policies once the initial
euphoria has created problems of depreciation and inflation.

R. Vaubel/ European Journal of Political Economy 13 (1997) 201-224

223

is believed to be neutral needs a smaller increase in monetary expansion and

inflation to generate the intended pre-election boom 20 and because it is a better
'scapegoat' (Kane, 1980) for the stabilization recession thereafter.

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