Journal Article

Independent central banks, regime type, and fiscal performance: the case of post-communist countries

Bodea, Cristina

2013

Overview

This article analyzes the effect of central bank independence on fiscal deficits. Previous literature finds a negative relationship between bank independence and deficits in OECD countries. No such relationship is found for developing countries. We argue that independent and conservative central bankers prefer budget discipline due to the long run connection between deficits and inflation and can enforce their preference through interest rate hikes and refusal to lend to the government. The claim, however, is that the legislated independent status of the central bank is cheap talk in the absence of democratic institutions. We test empirically the conditional effect of central bank independence on a sample of 23 democratic and undemocratic post-communist countries from 1990 to 2002. Results show that independent central banks restrain budget deficits only in democracies. Also, democracies that have not granted independence to their central banks have the worst fiscal discipline.

• Publisher: Springer,Springer US,Springer Nature B.V
• Subject: Banking / Budget deficit / Budget deficits / Budgets / Central bank independence / Central Banks / Communism / Communist societies / Deficits / Democracy / Developing Countries / Economic models / Economic performance / Economics / Economics and Finance / Federal budget deficit / Freedom of the press / Government budgets / Gross domestic product / Gross domestic product indices / Independence / Inflation / Interest Rate / Interest rates / LDCs / OECD / Political Science / Politics / Post-communist societies / Postcommunist Societies / Public Finance / Refusal / Studies