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The Global Diffusion of Central Bank Independence: Simulating and Extending Kingdon's Streams Model
Orit Gertzek-Rapport*, David Levi-Faur** & Dan Miodownik *** School of Political Sciences, University of Haifa Mount Carmel Haifa, Israel 31905 Fax 972-4-8257785 Emails: [email protected]*, [email protected] **, [email protected] ***
Paper for presentation at the workshop “The diffusion of policies and institutions”, ECPR Joint sessions of workshops, Nicosia (Cyprus), 25-30 April 2006.
The Global Diffusion of Central Bank Independence: Simulating and Extending Kingdon's Streams Model
Abstract
The emergence of an ever-widening sphere of global public policy is a current reality
in a world characterized by the blurring of boundaries between the national and the
global. This study seeks to shed some light on an empirical puzzle, the rapid spread
on a global scale of central bank independence (CBI) reforms that took place mainly
during the 1990’s. It does so in three ways. First, it offers a diffusion perspective as
complementary alternative to the ever growing literature on the subject. Second, it
builds on and extends Kingdon’s streams model of public policy (1995) in order to
un-pack the domestic public policy black box only rarely accounted for by students of
diffusion processes. Third, some of the elements of the integrated theoretical model of
diffusion in a global context are formalized using an agent-based computer simulation
methodology. Diffusion is defined as a process where practices, ideas or institutions
are communicated in an uncoordinated manner through certain channels over time
among the members of a social system. Diffusion is said to have causal effects on the
rate and scope of adoption of central bank independence as long as prior adoption of
the reforms increases the probability of adoption for the remaining non-adopters.
Overall we suggest that our extension of Kingdon's model help un-pack some of the
domestic political contingencies that affecting reforms; moves discussions well
beyond rationalistic assumptions that often characterize formal models of policy
making; and establishes a clear linkage between domestic and international aspects of
global policy changes.
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The Global Diffusion of Central Bank Independence: Simulating and Extending Kingdon's Streams Model
New Science of Politics is needed for a new world [Tocqueville]1
Diffusion approaches for the analysis of political and policy change are
becoming increasingly popular in the social science literature and for good reasons.
Ideas, institutions and people travel fast, frequently, and cheaply nowadays more than
ever before. News and information on social, economic and political matters are
readily available, and easily accessible widely through the World-Wide-Web and
other global media outlets. The combined effect constitutes a global and
interconnected environment where the propensity to adopt some innovations is
positively correlated with the adoption of others. This paper sets out to examine these
changing patterns of political action through a study of the reform of central bank
independence. These reforms redraw in the last decades the boundaries between
politicians and regulocrats, expanding the authority of the later. This paper traces the
origins and the rationale of the reforms as a prototype of public policy in a global
world.
The interconnectedness of our world constitutes emerging spheres, in which
actions, events or institutions on one part of the globe are increasingly visible and
significant elsewhere. This emerging global reality requires some attention to what
may be best labeled as a 'global public policy' and it is in this framework that allows
us best to capture the process of change in the governance of monetary policy and
central banks. The notion of a global public policy follows from the logic of the
interconnected polity. Boundaries between and within the units in the system are
increasingly eroding. Well-defined domestic and global spheres of political and
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policy activity are in a constant state of flux, facilitating diffusion of practices, ideas
and institutions. Diffusion and globalization may be best perceived as two pillars of
an emerging new global order. Rather than entailing the imposition of external top-
down constraints on national actors, globalization should be identified with the
diffusion of practices, ideas and institutions beyond national and regional borders (cf.
Detlef, 2006).
The reforms in the status of the central bank, policy measures taken all over
the world beginning in the 1980s and accelerating during the 1990s, serves as a
remarkable background to demonstrate and assess our approach for the study of
global change. Central Banks were always among the most critical institutions of the
modern state and the central bankers that traditionally enjoyed considerable degree of
autonomy from political control. Yet, for reasons that are the concern of this paper, in
recent years banks have become even more central and their managers more
autonomous. More so, in a short period, mainly in the 1990s, more countries reformed
their central banks than in any other decade since World War II (Maxfield, 1997, 4).
While conventional wisdom attests to the fact that the normative argument in
favour of central bank independence may indeed have been 'won', scholars still
struggle to grasp the puzzle of this widespread change. We engage in this debate by
seeking answers to the following question: Why did so many governments start
franticly to give independence to their central banks during the 1990s, granting them
more legal, formal and most often also practical autonomy from elected officials, thus
weakening their political controls over important spheres of economic activity?
To address this puzzle we review the growing body of literature - quantitative,
qualitative and formal, on diffusion and highlight some of its strengths and several of
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its weakness. We then develop a theoretical framework of policy diffusion that
incorporates conventional understanding on policy making process. The theoretical
explanation we advance draws on policy-process models, and particularly on
Kingdon's steams model of public policy (1995).
Kingdon’s insightful alternative, not only accounts for what other models
omitted, but can be extended to other spheres. While, he did not cover international
diffusion in his model, nor did he treat the issue of global public policies, his
framework can be very useful to understand how globalization, as a diffusion process,
interplays with the domestic political processes. Attributes of the policy process itself
play a critical role in determining the policy outcome in Kingdon's model and it
therefore offers a powerful alternative to dominant approaches that marginalized
processes in favour of input output correlations, that undermine or misrepresent the
global, that rationalize decision making and that do not allow for contingency in
policy making.
Inspired by the work of Kingdon, we develop a theoretical framework of
global policy diffusion that highlights the interaction between different streams and
enhances the centrality of the organized anarchy in global policy making process. We
formalize this framework using a dynamic agent-based computer simulation
methodology. The theoretical framework turns attention to the importance of the
process through which central bank reforms turns into a policy. Specifically, our
model and simulation of the diffusion of central bank reforms allow us to examine
global public policy as (a) a two level game where the domestic is the realm of
politics and the global is the realm of the policy of ideas; (b) as a process rather than a
black box where certain inputs are linearly and rationality connected to certain
outputs; and, (c) where the problems that originated the policy solutions, and the
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political situations creating the window of opportunity, are contingent elements of
domestic policy processes.
The paper proceeds as follows: it begins with an overview of three current
debates in the social sciences literature on central banking. Its second part discusses
the potential contribution of the diffusion literature to the study of central bank
reforms. The third part discusses Kingdon's streams model and extend it as a theory
of global public policy making in which diffusion plays a central role. The fourth part
presents our model of change and the results of the simulation. The fifth part
concludes.
I. Explaining Central Bank Independence
The extent of the far-reaching change that took place in the structuring of the
world's monetary systems beginning in the 1980’s is an empirical fact. Yet, as Figure
1 illustrates, only eight countries increased the independence of their central bank in
the period of twenty years that span from the collapse of the Bretton-Woods system in
the early 1970s and 1989. In the 1990s, however, 68 additional countries raised the
independence of their central banks, and 14 others jumped on the reform bandwagon
between 2000 and 2002. In a short period, mainly in the 1990s, more countries
reformed their central banks than in any other decade since World War II (Maxfield,
1997, 4).
Figure 1: Central bank independence (Source: Marcussen (2005))
5
0
20
40
60
80
100
120
140
160
180
200
1870 1910 1950 1990
Total number of sovereign states
Cumulative number of central banks
Cumulative number of independent central banks
Indeed many countries redraw the institutional rules and re-defined the scope
and extent of autonomy of their central banks in a short span of time. Countries
reformed their central banks in a very similar way, adopting a template of change that
included, among other methods, the insulation of central banks from political control
via instruments such as autonomous budget and fixed-tenure for the commissioners
and constraints on political appointments (Cukierman, 1992; Goodman, 1991;
Maxfield, 1997). This shifted the balance of powers in favor of bankers (rather than
politicians), and biased monetary management to favor lower inflation over other
social and economic goals (McNamara, 2002; Posen, 1995).
Previous attempts to answer the question of central bank independence have
yielded lively debates between scholars drawing explanations based on functionalist
versus power-centred approaches; materialist versus constructivist approaches; and
between observers highlighting domestic reasons for central bank independence and
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others emphasizing the centrality of the international arena. As will be evident from
the discussion these approaches are partly overlapping.
(a) The Functionalist- Power Centred Divide
Functionalist explanations focus on the economic benefits of enhanced forms
of delegation and autonomous institutions (Rogoff, 1985; Cukierman, Webb and
Neyapti, 1992; Cukierman, 1996; Eijffinger and De Haan, 1996; Alesina and
Summers, 1993). Characteristically for functionalist explanations, the elements of
causal analysis (e.g. why do they delegate) are often intermingled with elements of
normative analysis (e.g. why should they delegate).
From this perspective in order to enhance economic stability and performances
countries delegate authority and extend the autonomy to central bankers and develop
mechanisms to insulate them from 'political interference' - direct political pressures of
elected politicians that are motivated, so it is common to assume, by their desire to
retain office.
Politicians, therefore, have stronger incentives to pursue policy outcomes that
satisfy their constituencies and consequently enhance their electoral support
(Bernhard, 1998). Controlling the monetary system allows politicians to succeed
(albeit temporarily) in achieving range of economic objectives such as high
employment, financing of the budget deficit and low interest rates through monetary
expansion (Cukierman, 1994, 1437). Insulation of central banker from interference by
politicians is an essential instrument in guaranteeing that important economic decision
will not be affected by elected politicians’ short-term horizons.
While contested in the academic literature, it is safe to state that functional
explanations dominate most conventional explanations of central banking reform.
Interestingly, however, functionalist explanations did not received strong empirical
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support before reforms began to spread in the early 1990’s and are still empirically
contested.
Power-centred explanations are often suggested as complementary and
sometimes as an alternative to functionalist explanations of CBI. Common to all
power-centred explanations is the assertion that power matters and that power
considerations by the executive and the legislators are critical elements of the reform
decision. Scholars often take for granted the functionalist imperative of independence
and choose to supplement this approach exploring the political feasibility and
rationale of the new institutional design. Goodman, for example, argues that
functionalist explanations may indeed be valid, yet they can not account for stark
variation in the degree of independence among central banks (Goodman, 1991, 330).
Power centered explanations appear in three guises: rational-choice
institutional and societal. Rational choice explanations assume that politicians
generally wish to maintain a high degree of autonomy and are power maximizers.
Politicians will be willing to delegate power if it is strategically beneficial. Three
binding strategies can be observed in the literature. First, Politicians may decide to
enhance their credibility as reformers by tying one's hands thus delegate power to
assure market players and international investors that they are committed to market-
enhancing policies. Second, politicians may choose a tying one's successor strategy to
constrain their successor's ability to control the direction of monetary policy. Indeed
authoritarian regimes, facing transition to democracy, use central bank independence
as a mechanism to limit the power of democratic leaders (Boyland 1988). A third
variant suggest that politicians delegate in order to tie their partners' hands pushing
forward central bank reform while preventing from other members of the coalition
from influencing monetary policy in undesired directions (Bernhard, 1998, 315).
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Polillo and Guillén (2005) suggest, for example, that central bank independence is
more likely to occur when the degree of party fractionalization is higher. Lastly, the
blame-shift game strategy suggests that delegation occurs because it allows elected
politicians to alleviate pressures for accountability and distance themselves from
unpopular economic measures or financial fiascos (Maxifield, 1997, 12).
A second, institutional, power-centered approach to central bank
independence emphasizes the compatibility between the institutions of the state and
its political culture and the structure of the central bank (Busch, 1994). From this
point of view central banks reforms are more likely to emerge in countries with a
federal form of government. In these countries, traditional sentiment against the
concentration of financial power in the hands of the national government leads to a
consensus in favor of central bank independence as an additional check and balance
mechanism. The truncated history of the United States Federal Banking may serve to
support this point and so is the fact that federalist states such as Germany and
Switzerland have independent central banks (Goodman, 1991, 331). Yet many
federalist countries, such as Canada, and Australia, do not have independent central
bank while non-federalist countries do.
The third, societal, power-centered approach highlights the role of groups and
business interests in shaping the delegation decision. Thus, it suggests that the
existence of a strong conservative societal coalition increases the probability for the
creation of an independent central bank (Posen, 1995). It has been argued, for
example, that the real source of the Bundesbank's effectiveness is not its statutory
independence but rather a widespread public acceptance of the need to make inflation
fighting a primary goal of economic policy as well as in the Bundesbank's ability to
act in concert with the 'social partners', that is, labor and business, in keeping down
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wage and price increases (McNamara, 2002, 58-59). In a more radical formulation
that power-centered approach suggests that delegation serves the interests of the
privileged groups in society. It allows and protects a distributional bias and
democratic deficit (Jayasuriya, 2001).
(b) The Materialist -Constructivist Divide
A second divide the literature on central bank reform juxtaposes materialist
and constructivist approaches for delegation decisions in general and central bank
independence in particular. The materialist approach perceives the act of delegation
as adaptive or strategic response for 'objective' problems or challenges. These
problems can be economic or political but the expectation in both cases is for strategic
and adaptive responses. Constructivist approaches by contrast suggests that the
behavior of individuals and collectives are a product of cultural and social processes
and that decisions are taken not directly as a response to external stable reality, but as
are mediated via constitutive and phenomenological frameworks. Notions such as
autonomy, credibility, inflation are perceptual variables that are constituted by a
social, including scientific, processes of rationalization.
Probably the most important scholarly voice that represents this constructivist
position in central banking is that of McNamara. She suggests that the replication and
diffusion of central bank reform was provoked in part by the need to find legitimacy
in terms of the prevailing norms (McNamara, 2002, 62). According to McNamara,
central bank independence has achieved an almost taken for granted status in
contemporary political life, with little questioning of its logic and effectiveness
(McNamara, 2002, 47). Governments choose to delegate not because of narrow
functional benefits, she asserts, but rather because delegation has important
legitimizing and symbolic properties which render it attractive in times of uncertainty
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or economic distress. The spread of CBI should be seen as a fundamentally social and
political phenomenon, rooted in the logic of organizational mimicry and global norms
of neoliberal governance. Independent central banking is diffused across borders
through the perceptions and actions of people seeking to replicate others' success and
legitimize their own efforts at reform by borrowing rules from other settings, even if
these rules are materially inappropriate to their local needs (McNamara, 2002, 48).
Ideational explanations that emphasize the role of epistemic communities in
facilitating central bank reforms belongs, such as King's (2005) study of the British
case, belongs in this category of explanations.
(c) The Domestic- International Divide
Finally, the literature on central bank independence can be farther divided
between approaches that emphasize the domestic character of the reforms and others
that highlight the importance of international setting and actors in the process. The
global spread of independent central banking is seen by those who adhere to domestic
centered explanations as a phenomenon emerging from the bottom-up as a result of
similar decision taken by essentially independent actors. Advocates of the centrality
of the international arena in the describe sets of international constraints that are
super-imposed on the national actors from the top-down. The link between the
domestic and the international is often unspecified and scholars are often
conceptualizing elements within these levels as the explanadum where the other
serves as the source of explanans. To follow this logic, central bank reforms can be
seen as either the international outcome of domestic explanans or alternative to the
domestic outcome of international explanans.
Domestic explanans mentioned in the literature as leading to international
change are, for example, successful performances of highly independent central banks
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(e.g. Bundesbank and Swiss National Banks (Cukierman, 1994, 1437)). Others
emphasize, for example, the importance of successful domestic coalitions in core
countries that may be able to “export” their preferred institutional designs to the
international arena. Simmons' study of central banking and international monetary
stability in the interwar area where the autonomy of the central banks at the national
level, resulted in instability at the international level, belongs to this category of
explanations (Simmons, 1996).
Explanans at the international level comes in two major forms. In the first the
international level is the source of coercion while in the second form it is the source of
cultural and ideational authority. The coercive version asserts the role of both
functional and power-centered factors but places them in the global rather than the
domestic arena. Conditionality in international borrowing and tough entry
requirement to the EU for Eastern European countries are often mentioned as
mechanisms of coercive pressure to delegate (McNamara, 2002, 47). The second
version of international level explanations emphasizes the role of ideas and
transnational networks of experts in the spread of the reforms. The normative
elements, that is, the perception of lower inflation as a superior and primary public
good and the association of independent central banking with it, explains the adoption
of central bank independence. Marcussen (2004) claims that central bankers,
worldwide, became an autonomous and self-governing knowledge community. They
constitute a large, homogenous community of like-minded individuals, organizing
themselves in a number of different international forums whom meet frequently.
Polillo and Guillén (2005) using inferential statistics and indicators of 'proximity'
found support to this view as well.
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There are at least four important conclusions that are coming from our analysis
of the central bank independence literature. First, it is a rich and flourishing literature
with progress in both the theoretical and empirical levels. Second, it is also a
fragmented literature that covers varied number of explanations, rooted in different
levels of analysis and within different paradigms of political and economic change.
Third, the scholarly attention for central banks seems to be growing but interesting
enough the scholarly growth seem to reflect also growing divergence in the number
and type of explanations offered. Fourth, there are very few attempts to integrate these
explanations into a coherent theoretical framework. Fifth, with the notable exception
of Polillo and Guillén (2005) scholars although early to recognize the importance of
other countries experience did not try to include diffusion variables in their
explanatory frameworks. In the next part of the paper we assess the various options
that are open for a diffusion model of central bank independence.
II. Central Bank Independence: A Diffusion Perspective
A diffusion perspective on central bank independence suggests that the
process of reforms involves interdependent decision-making. A study of a country’s
decision to reform its central bank, in isolation from decision (or lack thereof) taken
by other countries, misses some of the most important elements of the process. We
find it useful to start with a definition of diffusion. The literature offers many
definitions of diffusion but we find elements of three especially useful for our study.
The first definition is Roger's who argued that diffusion is “…the process by which an
innovation is communicated through certain channels over time among the members
of a social system” (Rogers, 1995, 5). Strang defines diffusion as "….any process
where prior adoption of a trait or practice in a population alters the probability of
adoption for remaining non-adopters “(Strang, 1991, 325). Notice that Strang’s
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definition does not specify the direction in which probabilities change (i.e. increase or
decrease). We suggest that a diffusion process entails an increase in the likelihood of
adoption, at least for some of the remaining non-adopters across the population.
Elkins and Simmons (2005) suggested a distinction between several sources of
convergence of actions, events or institutions (or in their terms temporal and spatial
clusters). One of them, uncoordinated interdependence is clearly a defining
characteristic of diffusion, while the other two, similar responses to similar
conditions, and coordinated action via negotiation reflect other structural elements
involved in convergent behavior.
To summarize, diffusion we argue is a process, revealed through an
uncoordinated process, rather than an outcome, an interdependent variable rather than
the dependent. We therefore suggest that the following definition for diffusion:
Diffusion is the process by which practices, ideas or institutions are
communicated through certain channels over time and in uncoordinated
manner among the members of a social system and where prior adoption of
an innovation increases the probability of adoption for some of the
population of the remaining non-adopters
This definition combines that social aspect of the innovation process as a
communicative enterprise as emphasized by Rogers, with a specific condition of
'uncoordinated interdependency' as emphasized by Elkins and Simmons. Following
Strang our definition adds directionality and statistical clarity two major element of
model-building and simulation. Lastly, the definition allows us to focus attention on
the process of diffusion rather than to its results, a feature central to the diffusion
theoretical framework and the simulation that we present below.
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Statistical and Formal Literature on Diffusion
Polillo and Guillén (2005) study of the worldwide spread of central bank
independence is a pioneering effort to apply large-N statistical methods for the study
of diffusion in this sphere. Unlike other scholars who focus exclusively on power-
centered and economic motives to adopt the reforms, Polillo and Guillén seek to
account for the coercive, normative and mimetic pressures that lead to convergence
on central bank independence. They employed both event history analysis and
Ordinary Least Squares regression with panels-corrected standard errors and country
fixed effects in order to explain the worldwide spread of central bank independence.
Polillo and Guillén develop elaborated and well thought off operational definitions of
the main explanatory variables and employ sophisticated and rigorous methods of
statistical analysis to explore their data. Overall they found support for the argument
that coercive, normative and mimetic pressures external to the state – pressures they
identify as associated with globalization, explain variation in decision to adopt central
bank independence reforms, while domestic indicators such as political and
macroeconomic variables, fail to do so.
There is much to be said in favor of Polillo and Guillén's work – their
theoretical model and the sophisticated methodological approach they adopted.
Nevertheless, rewarding, as they may be even sophisticated statistical techniques
cannot account for all aspects affecting the diffusion process, as they require the
scholar to correlate input and output behavior. More so, statistical studies are also
constrained by the need to apply second and sometime-third order indicators of the
concept studied. Even an excellent study like Poillo and Guillén's suffers from these
types of shortcomings. Take for example the notion of emulation central to their
theoretical account: Emulation is captured partly by the notion of normative pressure,
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a notion which is grounded in an argument about the global social structure, and that
such social relations are reflected in trade relations. The quantitative indicator of
normative emulation is presented as an interaction between pairs of trading countries
and the other country's index of central bank independence. This long and suggestive
chain connecting different conceptual shortcuts may raise significant reservations on
interpretations and inferences from the data. Yet, at least some of these limitations
can be overcome by the application of alternative methods of analysis including
formal models and computer simulations.
Braun and Gilardi's (2005) formal model of diffusion offers an alternative to
the statistical large-N and macro level studies. The main problem with the effort to
specify and empirically test theoretical mechanisms in the diffusion literature, they
argued, is that they are grounded in very different literatures and, therefore, not only
that a unified theory of diffusion does not exist, but that most explanations also tend
to be internally incoherent. In order to overcome this problem they offer expected
utility theory of diffusion suggesting that it can bring the various diffusion mechanism
under a common framework and which enjoys strong micro-foundations. Braun and
Gilardi make first steps in developing the missing theoretical framework embedding
seven diffusion mechanisms - learning, competitive and cooperative interdependence,
coercion, common norms, taken-for-grantedness, and symbolic imitation – within a
simple expected utility model where the expected utility depends on payoffs of the
policy and its effectiveness. In their model the seven mechanisms, of diffusion,
impact the utilization or the effectiveness of the policy choices, thus changing the
relationship between them, a change that might cause threshold cross, driving a policy
change.
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Polillo and Guillén (2005) and Braun and Gilardi (2006) offer, therefore, two
distinct yet complementing ways to conceptualize and farther develop a diffusion
perspective useful to explain the emergence of global public policy in general and
central bank independence in particular. Each of these has its own strengths and
weaknesses. Macro-studies, such as Polillo and Guillén's which are based on
quantitative empirical analysis are best set to corroborate and falsify theories. Yet,
they work at the macro-level and tend to forgo (or provide only unsatisfactory
accounts of) actor-centered analysis and are constraint by the use of distant proxies of
the variables of interest. Formal models such as Braun and Gilardi's may provide
more nuanced theoretical framework but it is hard or at times even impossible to test
them empirically.
In order to overcome the difficulties represented by these examples and their
respective research traditions it is necessary to develop a theoretical framework able
to account for the widespread decision to increase central bank independence (as well
as the general process of global public policy making), and to do so while describing
diffusion as a process rather than an outcome. If diffusion is indeed a source of
temporal and spatial source of convergence on central bank independence our
theoretical framework should be able to capture the interdependency of the decision to
reform the central banks across countries. The theoretical framework is developed
with some attention to the public policy literature and in particular to Kingdon's
streams model. The streams model is extended and integrated into our diffusion
framework with direct application to the realities of global public policy.
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III. A Thick Theory of Diffusion: Kingdon's Streams Model
In his Agendas, Alternatives and Political Polices (1995 [1984]) Kingodn
suggests a multiple stream model of public policy change. In his model policy change
happens when three parallel, interacting streams, of problems, policy and politics,
collide within a window of opportunity. The window of opportunity allows policy
entrepreneurs to couple a problem with solution. The coupling process is time
dependent, solutions and problems are chosen from the 'garbage can' to fit the
political situation or national mood at the time of the change. It is therefore the time
of the adoption, rather than simply the problem itself, that determines the type of
solution adopted. Kingdon's model closely builds on Cohen, March and Olsen's
"garbage can model of organizational choice" [1972]. Like their model he captures
the 'organized anarchy', contingencies and bounded rationality that characterizes
public policy process.
A key element of Kingdon's model is the notion of streams running through a
'system' of public policy: streams of problems, policies, and politics. These streams
are loosely coupled, meaning that they are largely independent of one another. Each
develops according to its own dynamics and rules and with its own type of actors and
networks. At some critical juncture, a window of opportunity may open, and policy
entrepreneurs may be able to couple problems, solutions and politics to produce
policy change. The Problems Stream is a space where different problems float.
Some problems become important, making their way to the agenda, while other
problems disappear. Although sporadic events are amongst various mechanisms that
bring problems to the public's attention, such events by themselves, can not pave a
problem's way to the agenda. Pre-existing conditions such as perceptions are also
required.
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The Policy Stream is where solutions to these problems are formulated and
discussed by epistemic communities. These communities consist of specialists. In the
communities, the number of solutions is narrowed to a list which will make it to the
agenda. According to Kingdon this process resembles the natural selection process in
evolutionary theory where only the suitable survive. He refers to the space where
policy solutions are discussed as the "policy primeval soup"; the solutions making it
to the agenda are the ones which met criteria for survival: can they be implemented?
In the policy stream, consensus is built largely through the process of persuasion and
diffusion (Kingdon 1995, 159). At some point a solution catches on (a tipping point),
and most specialists are considering this solution. The process that make this happen
is referred to by Kingdon as convincing diffusion, where the specialists convince one
another to acknowledge the benefits of a specific solution: As time progresses a
consensus regarding the solution is formulated and the solution can make its way to
the agenda. The Political Stream is composed of things like swings of national mood,
vagaries of public opinion, election results, changes of administration, shifts in
partisan or ideological distributions in parliament, and interest group campaigns.
In the political stream a policy solution goes through a process, referred by Kingdon
as bargaining diffusion. Utility, in political terms is in contrast to the policy's stream
emphasis on persuasion, the political stream's consensus building is governed by
bargaining" (Kingdon 1995, 159). The stream is affected by happenings and events
occurring within the country and with connection to wide variety of factors most of
them are not related to the benefits and costs of central bank independence directly.
These streams flow through the system all at once, each with a life of its own.
Solutions are developed whether or not they respond to a problem. The political steam
may change suddenly whether or not the policy community is ready or the problems
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facing the country have changed. Once we understand these streams taken separately,
the key to understanding agenda and policy change, argues Kingdon, is their coupling.
Coupling is the matching of solutions with problems and proposals with political
exigencies. It depends on the successful actions of policy entrepreneurs who are
multilevel (or multi-stream) actors. They are well informed and well versed in the
internal life and rules of the games of the problem, political and policy streams and
are capable of matching them skilfully at the right time, that is, when a window of
opportunity is opened. The window represents a limited period of time where
implementing the solution as a policy is feasible. During that period political
entrepreneurs have an opportunity to promote problems or solutions they are
lobbying. It should be emphasized that an opening of a window of opportunity does
not grantee policy change. Other factors, such as relevant political events are
necessary. However, when the window is closed the policy change is not likely to
occur.
Two more elements of Kingdon's model are highly attractive from our point of
view. First, is Kingdon's ability to deal with the contingent and random elements of
change which characterize complex systems. The second element of attraction from
our point of view is that Kingdon is not subscribing to the 'rationality assumption'. We
are unable to canvass, he write, many alternatives, keep them simultaneously in our
heads, and compare them systematically. We also do not usually clarify our goals and
much of the action in the streams is not about problem solving. Often, he adds, the
participants are not specifying their goals very precisely and are not identifying their
problems with care. They often seem to push for given proposals, developing
information about the problems they are supposedly solving along the way as a means
of justifying their position (Kingdon, 1995, 78).
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Finally, we find it necessary to extend Kingdon's model beyond the confines
of its original development, that is, federal public policy in the United States. We
distinguish between national and global streams and suggest that while the first in the
realm of politics the second is the realm of policy. Whereas decisions about the
timing of the reforms fall within the realm of politics, the general normative pressure
to reforms falls with the realm of policy. Whereas public opinion, national mood and
political calculations are the domain of the national stream, experts and epistemic
networks are the dominant forces at the global stream. Coupling is therefore the
process of matching the national and the global stream as well as the political and
policy stream. It is the process of matching global solution, from the global garbage
can, to national problem. In other words it is a two level game where two level policy
entrepreneurs, if successful, are responsible for global policy diffusion.
All in all, we extend Kingdon's streams model so as to be applicable to the
globalization of public policy and we suggest that such an effort is worthy for four
major reasons. First, it allows us to shed light on the contingent elements of politics
and policy in general and global public policy in particular. Second, it allows us to
unpack black box accounts of the diffusion processes which correlate input and output
indicators as measures of diffusion. Third, it allows us to move the discussion well
beyond the rationalist assumptions that often characterize formal models of policy
making. Fourth, in its extended form, it establishes clear linkages between domestic
and the international aspects of global policy change.
IV. Modeling the Diffusion of Central Bank Independence
Given the methodological limitations of both formal modeling and large-N
statistical model that operate on macro-data, scholars are turning to computer
21
simulation as a useful way to explore, model and get better understanding of political
change. Computer simulation offers a way to supplement analytical models by
working around several problems. First, computer algorithms allow us to solve formal
models that involve more than few variables. Second, computer simulations can be
very useful in charting the emergence of macro patterns out of the simple algorithmic
rules, a task which is virtually impossible in static formal models (Axelrod, 1997). It
is not surprising therefore those computer simulations are probably almost the only
way to test formal models particularly those that involve very complicated
interactions. In recent years, computer simulations, and agent-based methodology in
particular, have been emerging and holding more ground across the social sciences
(see Macy and Willer 2002, Cederman 2001 for useful reviews).
In order to demonstrate the feasibility of our approach for diffusion of central
bank reforms we constructed a simulation which builds on Kingdon's model. The
basic features of the model are described in figure 2. The three streams are
represented by ellipses which specify the variable associated with each stream and its
time-dependent dynamic. Central Bank reform occurs when (a) the window of
opportunity is true (that is, there is a political decision to adopt the reform and the
urgency of a problem is perceived above an urgency threshold) and (b) readiness plus
urgency is higher from the reform threshold.2
22
Political Stream
Problem Stream
Policy Stream
Urgency
Consensus
Readiness
Window of Opportunity
'Consensus' is 'true' and
Urgency > 'Urgency_Threshold
Reform Condition
'Window_of_Opportunity' is 'true' and
Readiness + Urgency > 'Reform_Threshold
CBI Reform
Random choice: True / false
Random change
Update Readiness According to formula 1
Figure 2: Model
Calculate neighbours' Readiness weighted average
We defined the urgency variable as a random variable to reflect the different
probabilities of problems to surface in the global garbage can. The “policy stream” is
a metaphor to a convincing diffusion process occurring inside epistemic communities.
23
Some of the solutions, passing a selection process, resembling the process occurring
in natural realm, reach the public's eye and capture its attention. The level of
“implementation readiness” of each solution characterizes the selection process. As
indicated, we propose to extend the scope of the diffusion that shapes the policy
stream to include external influences. The policy stream will be implemented by
updating the readiness level of a solution in each country while considering the
average readiness of that solution in other countries. We argue that not all countries
have the same impact on other countries. The model assumes that the weight of a
country with an independent central bank is higher than the influence of a country
with a non-independent central bank. Therefore, a weight is associated with each
country’s influence, and a weighted average is calculated reflecting the relative
influence of the neighbours.
It should be noted that the readiness by itself can not cause a reform. In the
simulation, this is achieved by limiting its growth when approaching the threshold. It
is common in models of dynamic systems to use a logistic equation as a simple
description of growth where the change is controlled by a growth factor on the one
hand and by a limiting factor on the other hand (Strogatz, 1994). In the model, the
change in readiness is proportional to the difference between the average readiness of
the neighbours and each country’s own readiness. The readiness is also proportional
to the difference between a readiness limiting factor and its current value; thus, as the
readiness approaches the limiting factor its growth approaches zero since the second
factor of the multiplication (see below), approaches zero. In the model we use a
reform threshold as the limiting factor. The reform threshold symbolizes the
resistance towards the reform. Formula 1 describes the change in the readiness
resulting form neighbours' influence:
24
Formula 1: 1
1( )(im
j j i iji
i
w r r threshold rm
rthreshold
=
)− −∆ =
∑
Where:
∆ri: the change in the readiness of country i. ri: the readiness in country i. mi: the count of country i's neighbours. wj: a weight associated with country j, representing its influence. The
weight's ratio between CBI countries and non CBI countries is defined as the influence ratio.
threshold: the transition to CBI threshold3.
The “political stream” is the metaphor for the process in which decision-
makers weight different solutions and decide through bargaining which one is
suitable, considering the constraints imposed by the current political situation. The
final result of the bargaining process is a consensus. Therefore, "Consensus" is the
variable associated with the political stream in Figure 2. “Consensus” will be
simulated as a random dichotomy variable determining whether a specific solution to
a given problem is politically suitable.
Kingdon defines a policy window as a limited period of time where
implementing the solution as a policy is feasible. In the model we refer to the policy
window as the solutions' window of opportunity. In the simulation, a window will
open when the problem is on the public agenda, thus its urgency level is above a
certain threshold referred in Figure 2 as the 'urgency threshold'. In addition, for the
window to open, a consensus must exist regarding the solution. Thus, the window of
opportunity is defined as the conjunction of the two conditions, as the upper yellow
box in Figure 2 displays.
We suggest that a solution will be turned into a policy when the window of
opportunity is opened and sum of problem urgency and the solution readiness exceeds
25
a threshold as displayed in the lower yellow box in Figure 2. We refer to this
threshold as a 'reform threshold'. The rational is that in practice there is interplay
between the urgency of a problem and the readiness of the solution: when the problem
is considered as urgent, less ready solutions can achieve consensus by the decision
makers. For example although the central bank independence idea reached a high
level of readiness in the 1990's, a reform that increased the independence of the bank
of Israel occurred in 1985 since increasing the bank's independence was proposed as a
solution to the extremely urgent hyper inflation problem that was on the top of the
agenda at that time (Maman and Rosenhek 2005).
(a) Simulation Platform
We use the PS-I platform. PS-I is a simulation tool built specifically for
defining and testing agent-based models. Unlike many other simulation tool kits PS-I
does not require the user to have any programming knowledge and therefore it has
moderate learning curve. The tool enables the creation of virtual worlds where agents
can interact in abstract spatial and temporal settings. PS-I was used to develop several
agent-based simulations (Lustick, Miodownik and Eidelson, 2004; Lustick and
Miodownik, 2000; 2002). 4
The simulation environment is composed of a grid inhabited by a large
number of virtual agents that interact repeatedly and update their behaviour following
a set of simple micro-rules. We study a virtual world contained in a 14x14 matrix with
196 agents, representing a virtual country. Each country interacts with the
neighbouring countries in its near proximity. The interaction reflects mutual influence
that impacts the readiness of the implementation of a certain policy in each country.
The readiness is represented on a scale from zero to a maximum value, as specified by
a model parameter. Geographical proximity in the model does not necessarily reflect
26
geographical proximity in the real world, but rather influential relationships (resulting
from mutual commerce, political pressures and etc.). Each country has a central bank
which can be either independent or dependent. In the world matrix, countries with an
independent central bank are represented by yellow squares, while countries with non-
independent central banks are represented by green squares.
Figure 3: Streams representation
Yellow Square: Triple Square: A country with a dependent CB. CBI
Double Square: A country with a dependent CB. CBI
A country with an
Green foreground represents the problem's urgency. A
Green foreground represents the problem's urgency. A
Blue background represents the policy readiness. A
Blue background represents the policy readiness. A
As mentioned earlier, each country maintains three streams: problem, policy
and political. In the simulation, a single problem is traced. The problem can be
different for each country; however, central bank independence is one of the proposed
policies for resolving the problem. In each country, the urgency of the problem is
maintained. This urgency is represented by a number ranging from zero to max
urgency (which is also a model parameter). When the value of the urgency exceeds an
urgency threshold, the problem makes it to the public agenda. In the simulation, the
problem urgency is a uniformly distributed random variable. Depending on a
simulation parameter "is urgency rising", the value of the urgency grows by a random
27
quantity, or randomly recalculated, in each simulation cycle. The political stream
determines whether the central bank independence policy is suitable in the current
political situation. This stream is represented in the simulation by a dichotomized
random variable. The graphical representation of the streams is explained in Figure 3.
Since before the 1990s CBI outbreak only a few countries had independent
central banks, the initial world of the run is created with 2 per cent probability that a
country’s central bank is independent. Thus, in the 196 countries randomly created
virtual world, only four countries, on the average, have an independent central bank.
Figure 4 is an example of the virtual world. Figure 5 provides a visual presentation of
the streams view during the simulation.
Figure 4: The virtual world
T=0 T=173 T=326
Figure 5: Streams view
28
T=0 T=173
Figure 6 lists the parameters that control the simulation. The description column in the
parameter screen documents the various model parameters and the permissible values
of each.
Figure 6: Model Parameters
(b) Simulation Results
Figure 7 is a typical graph describing the progress of the process of running the
simulation until all countries have an independent central bank. This is a graph of an
experiment where the threshold is 10000, the maximum value of the urgency is 1000,
29
and the urgency threshold is 500. The influence ratio between CBI and non-CBI
countries was 4:1.
Figure 7 : Simulated CBI outbreak
To study the aggregate behaviour of the model a several set of experiments
were performed. In each set, one of the model parameters was modified and the model
was executed 10 times, to observe the average behaviour. The purpose of the
experiments was to test how the aggregate behaviour is affected when changing the
different parameters. The objective of the tests was to study the sensitivity of the
aggregate behaviour of the model. Appendix 1 describes the results of the sensitivity
analysis.
Experimenting with the extended streams model demonstrates that under a
wide range of circumstances, the aggregate behaviour results in almost total
convergence, where most agents end up reforming their central bank. The simulation
results suggest that under the influence of diffusion a reform that can happen is likely
30
to happen. Although the aggregate behaviour can be predicted, it is not possible to
determine when a specific agent will reform.
The sensitivity analysis suggest that the characteristics of the aggregate
behaviour, mainly the length of the incubation period ad the slope of the S-shaped
curve (which determines the speed of the reform process), are influenced by factors
relate to the strength of links between a country and the neighbours it is influenced by.
Obviously, these results were expected. Another consequence is that although
analytical models of the utility benefits of the decision makers provide insight at the
micro level, at the aggregate level the diffusion forces dominate.
V. Conclusions
Let us now summarize our model of central bank independence and contrast it
with alternative explanations. First, we suggest that in our era of globalization public
policies, that is, ideas about policies, policy practices and policy institutions are
diffused in the sense that adoption of policy innovations involves uncoordinated
interdependences. This suggestion necessitates a change in our research design and
calls for a more global approach for public policy analysis. It can be measured across
the population of adopters to show if and how the prior adoption of the reforms
increases the probability of adoption for the remaining non-adopters. Second, whereas
black-box public policy models starts with a problem, our model allows for a study of
global policy change that where solutions are looking for problems rather than the
other way around and where ''organized anarchies" shape the contingent elements of
31
policy adoption. Third, whereas black-box models of public policy correlate inputs
with outputs, our model does not ignore the process of public policy as a distinct
element in the determination of outcomes (e.g., scope and timing of reform adoption).
Fourth, our model interlinks the global and the national by embedding them in the
actors' characteristics rather than as distinctive arenas. It also suggested that national
is mainly the realm of politics while the global is mainly the realm of policy.
Kingdon's extended stream model was simulated in order to demonstrate its
feasibility and ability to portray how the interactions of actors and the coupling of
streams allows uncoordinated interdependencies to result in a S-like diffusion pattern
where a considerable number of the population of actors is converging on central
bank independence. While our sensitivity tests demonstrated its internal validity, its
external validity is beyond the scope of this paper. In order to validate it beyond the
boundaries of the simulation we need to carry empirical research that will corroborate
or falsify the thick model of diffusion we developed here. Unlike Braun and Gilardi
(2006) who concluded their exercise in formal modelling of diffusion with the
conclusion their model does not imply a radical change in current research strategic,
we suggest a model that requires important revisions in current practices of empirical
testing of diffusion models. Specifically, we call for statistical tests and modelling that
allow for contingent elements, interlink the global and the national in a non-
mechanistic manner and put more serious attention to the constructivist elements of
political change in general and central bank reforms in particular.
Appendix 1: Sensitivity analysis
The aim of the sensitivity analysis is to study the conditions under which a
convergence occurs and to analyze how each parameter impacts the model's aggregate
behaviour.
32
The aggregate behaviour will be characterized using following three metrics.
First is the incubation period defined as the number of cycles until the first reform
occurs. In the graphs below, the unit of the incubation period is simulation cycles,
representing the time elapsed from the beginning of the simulation. Second is the
outbreak period, defined as the period, in the simulation cycles, where the slope of the
S-curve is greater than 0.5. In the graphs below, the unit of outbreak period is
simulation cycles, representing the time elapsed from the beginning of the simulation.
Third is the S-curve slope defined as the slope of the line segment connecting the two
ends of the outbreak period. In the graphs below, the value of the slope is multiplied
by 100. The sensitivity analysis performed on three parameters: the influence radius,
empty agents and max urgency which shape the aggregate behaviour of the model.
For each parameter, three graphs were produced: (a) slope, (b) outbreak period and (c)
incubation period. The red curves are best-fit curves describing the orientation of the
data.
(a) Influence radius
The influence radius defines the maximum distance, in grid cells, of the
country's neighbours in the world grid. All the neighbours within that radius influence
the country's policy stream. Figure 8 describes the effect of increasing the influence
radius on the incubation period, the outbreak period and S-curve slope. As the
influence radius increases the incubation period and the slope increase as well (Figure
8a and 8c). This result is expected since at the beginning there are just few countries
with an independent central bank, thus, when the influence radius is small, the
diffusion effect of these countries is bigger, as the following example demonstrates:
assuming that a county has only one neighbour with an independent central bank.
When the influence radius is 1, thus each country has 8 neighbours. When the
33
influence radius is 2, the country has 24 neighbours, thus the weight of the neighbour
with an independent central bank is significantly smaller. As Figure 8(b) shows, the
outbreak period decreases exponentially as the influence radius increases.
Figure 8 (b): Influence Radius Effects
0
50
100
150
200
250
0 2 4 6 8
Influence Radius
Out
brea
k pe
riod
Figure 8 (a): Influence Radius Effects
0
100
200
300
400
500
0 2 4 6 8
Influence Radius
Slop
e * 1
00
Figure 8 (c): Influence Radius Effects
0
100
200
300
400
500
0 2 4 6 8Influence Radius
Incu
batio
n pe
riod
(b) Empty Agents
In a standard world grid, every agent had the same number of neighbours.
Thus, every country is affected by the same number of neighbours. Obviously this
assumption is unrealistic. We refer to agents with independent central bank and agents
with non independent central banks as active or non empty agents. By setting the total
of non empty agents at the beginning of the simulation to a number less than 100%,
we create a situation where the number of neighbours for each agents varies
randomly, since the PS-I framework fills in the missing spots in the world matrix by
empty agents that do not participate in the simulation. Figure 9 describes the influence
of decreasing the number of active agents (i.e., both agents with independent and non-
independent central banks) on the simulation. Although the S-curve slope (Figure 9a)
34
is decreasing, as more empty agents participate in the simulation, the impact on the
incubation and the outbreak periods (Figures 9b and 9c) is minor.
Figure 9: (a) Empty agents sensitivity analysis
020406080
100120140160
60 65 70 75 80 85 90 95
Non-Empty Agents
Slop
e * 1
00
Figure 9: (b) Empty agents sensitivity analysis
0
50
100
150
200
250
60 65 70 75 80 85 90 95
Non-Empty Agents
Out
brea
k pe
riod
Figure 9: (c) Empty agents sensitivity
analysis
0100200300400500600
60 65 70 75 80 85 90 95
Non-Empty Agents
Incu
batio
n Pe
riod
(c) Max Urgency
The max urgency parameter determines the maximum value of the problem
urgency random variable. Max urgency is added to the readiness and compared
against the reform threshold. As Figure 10 (a and b) shows, increasing the value of the
max urgency strongly affects the outbreak period and the S-curve slope. The impact
on the incubation period is insignificant (Figure 10c). This result suggests that the
diffusion process is the main force behind the process. Increasing the max urgency
increases the magnitude of the problem. As the simulation shows, the influence of this
magnitude is secondary to the influence of the diffusion process.
35
Figure 10 (a): Max urgency sensitivity analysis
0
50
100
150
200
250
300
500 700 900 1100 1300 1500 1700 1900
Max_Uergency
Slop
e * 1
00
Figure 10 (b): Max urgency sensitivity analysis
0
50
100
150
200
250
300
500 700 900 1100 1300 1500 1700 1900
Max_Uergency
Out
brea
k pe
riod
Figure 10 (c): Max urgency sensitivity
analysis
0100200300400500600
500 1000 1500
Max_Uergency
Incu
batio
n Pe
riod
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Endnotes: 1 Cited in Olsen, 2001, pp. 196 2 It is important to note that in our model CBI is treated as a dichotomous variable.
3 A few comments regarding the above formula: (a) The model uses the same constant threshold value for all countries; (b) it is assumed that the readiness always increases with time. Furthermore, readiness cannot exceed the threshold (otherwise ∆ri will be negative).
4 More information about PS-I can be found in www.psych.upenn.edu/sacsec/abir.
39