The politics of institutional reform: The 'Declaration of Independence' of the Israeli Central Bank

Over the last two decades, increasing numbers of central banks in both developed and developing countries have gained independence from political echelons and other state bureaucracies, becoming important actors in the political arena with the capacity to significantly affect the configuration and functioning of national economies. Through a detailed process-tracing analysis, this paper studies the institutional turning point in the position of the Israeli central bank within the state institutional configuration: namely, the amendment of the Bank of Israel Law in 1985 which prohibits the central bank from providing loans to the government to finance budgetary deficits. The analysis focuses on the conditions that facilitated the institutional change, as well as on the actors and mechanisms that were involved in the process. This legislative amendment, which opened the path to the increasing independence of the Bank of Israel, was the result of the constitution of a new cross-national field of policy-making, comprised of both local and foreign political actors: the Israeli Ministry of Finance, the US government and a cross-national network of Israeli and American academic economists. Mechanisms of both inter-state dominance and expert power operated and interacted with each other within this field, producing synergetic effects that fostered the dynamic that led to central bank independence.