The relationship between the fiscal authority and the central bank is a key component of the institutional structure of macroeconomic policy-making. If the central bank is subservient to the fiscal authority, the fiscal authority will be more able to secure monetary financing of a fiscal deficit. This makes a policy of price stability less credible. On the other hand, establishing an independent central bank, or strengthening the nominal independence of an existing central bank, can be an institutional expression of a commitment to price stability. A central bank that is strong enough to refuse to finance an imprudent fiscal deficit helps to deter such deficits from occurring.
Institutions are the means by which policy decisions are made effective.
Policies without organizations capable and willing to implement them are not credible. Suppose, for example, that a leader decrees that peasant farmers will be granted ownership of the land that they farm. If that leader does not also set up institutions for registering titles to the land, for resolving conflicting land claims, and for facilitating the transfer of land among persons, the policy of giving land to the peasants is less credible. Similarly, a policy to promote competition in telecommunications is less credible if its implementation is entrusted to the ministry that runs the existing telecommunications monopoly.