Empirical studies of central bank independence and inflation identify Japan as an outlier. By standard measures, the Bank of Japan is one of the least independent central banks in the world, and yet Japan enjoys some of the lowest inflation rates. This paper develops a model of monetary linkages with implications for the institutional commitment to price stability. The model explains why price stability in the "old" Japan-with its powerful bureaucracy and single-party rule-did not necessarily rely on monetary institutions. It predicts that the "new" Japan, in which power is shifting from the bureaucracy to elected politicians who compete with each other in the political marketplace, must make use of monetary institutions to achieve price stability.
Keywords: Design of central banking institutions; Linkage politics; Japanese political economy
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.