Independent central banks prefer balanced budgets due to the long-run connection between deficits and inflation, and can enforce their preference through interest rate increases and denial of credit to the government. This article argues that legal central bank independence (CBI) deters fiscal deficits predominantly in countries with rule of law and impartial contract enforcement, a free press and constraints on executive power. It further suggests that CBI may not affect fiscal deficits in a counter-cyclical fashion, but instead depending on the electoral calendar and government partisanship. The article also tests the novel hypotheses using new yearly data on legal CBI for seventy-eight countries from 1970 to 2007. The results show that CBI restrains deficits only in democracies, during non-election years and under left government tenures.

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In dominant party regimes, party cadres' participation in decision-making constrains dictators from arbitrarily changing policy. Party based regimes are also better at mobilizing supporters in exchange for extensive patronage. The conventional wisdom is that these two mechanisms work together to prolong dominant party regimes. However, under certain conditions, the elite-level constraints restrict autocratic leaders' ability to engage in patronage distribution. We focus on monetary institutions, arguing that when central bank independence overlaps with the collective decision-making in dominant party regimes, dictators have diminished control over the central bank. Thus the central bank is effective enough to restrict expansionary fiscal policy, reducing the mobilization of supporters through patronage and increasing authoritarian breakdown risk. Analyses on data from 1970 to 2012 in 94 autocracies find that high central bank independence in dominant party regimes increases the likelihood of breakdown. Moreover, independent central banks in partybased autocracies contribute to lower fiscal expenditures.