Central Bank Independence and Fiscal Policy: Can the Central Bank Restrain Deficit Spending?

Bodea, Cristina; Higashijima, Masaaki

doi:10.1017/s0007123415000058

Cited by 83 publications

(70 citation statements)

References 85 publications

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“…Furthermore, the democratic political process is more transparent, making rule violations evident to the public and the opposition (Broz 2002, Stasavage 2003. Finally, broad rule of law guarantees certain levels of compliance with laws giving autonomy to bureaucratic agencies like the central bank (Bodea and Higashijima 2015). Although price stability -the key focus of modern central banks -may be better achieved in democracies, independent central banks also perform other functions, and may have different effects across institutional settings.…”

Section: Central Banks In Authoritarian Regimesmentioning

confidence: 99%

“…23 Data is from Bodea and Higashijima (2015), supplemented with IMF Article IV and Annual Country Reports. (http://www.imf.org/external/np/sec/aiv/index.aspx; date accessed: January 2017).…”

Section: Causal Mechanism: Limits On Fiscal Spendingmentioning

confidence: 99%

“…presence of such political constraints, it is more difficult for political leaders to infringe the autonomy of legally independent central bankers, resulting in low inflation and a healthy fiscal balance (Bodea and Hicks 2015b, Bodea and Higashijima 2015, Broz 2002, Keefer and Stasavage 2003. To a great degree, the consensus in this literature -that central bank independence matters in democracies -has emerged because it has been hard to identify the political constraints that might operate in dictatorships.…”

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confidence: 99%

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Economic Institutions and Autocratic Breakdown: Monetary Constraints and Fiscal Spending in Dominant-Party Regimes

Bodea¹,

Garriga²,

Higashijima³

2019

The Journal of Politics

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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.

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Section: Central Banks In Authoritarian Regimesmentioning

confidence: 99%

Section: Causal Mechanism: Limits On Fiscal Spendingmentioning

confidence: 99%

mentioning

confidence: 99%

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Economic Institutions and Autocratic Breakdown: Monetary Constraints and Fiscal Spending in Dominant-Party Regimes

Bodea¹,

Garriga²,

Higashijima³

2019

The Journal of Politics

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“…ing of the relationship between fiscal policy and inflation in emerging economies. Furthermore, it is sometimes argued that Central Bank independence acts as a mechanism that increases fiscal responsibility of the government in developing countries (Bodea and Higashijima (2015), Minea and Tapsoba (2014)). We believe further research is necessary to understand the institutional arrangements that govern the relationship between a Central Bank and the Fiscal Authority in the presence of competing objectives and constraints.…”

Section: Discussionmentioning

confidence: 99%

Fiscal Policy and Inflation: Understanding the Role of Expectations in Mexico

López-Martín¹,

Aguilar²,

Samano³

2018

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This paper estimates a hidden Markov model where inflation is determined by government deficits financed through money creation and by expectations dynamics. The baseline model, proposed by Sargent et al. (2009) is able to distinguish between causes and remedies of hyperinflation, such as persistent or transitory shocks to fiscal deficits, and the de-anchoring of inflation expectations. The estimated sequence of monetized deficits provides an adequate account of inflation for the period 1969-94. The paper then extends the model to analyze the possibility that fiscal policy can affect inflation expectations in a context of Central Bank independence, as is the case of Mexico after 1994. Evidence is found that the exchange rate and sovereign interest rate spreads influence the evolution of inflation.Resumen: Este documento estima un modelo de Markov oculto en el cual la inflación se determina a partir de déficits fiscales financiados mediante emisión monetaria así como por la dinámica de expectativas de inflación. El modelo base, propuesto por Sargent et al. (2009), es capaz de distinguir entre las causas y remedios de procesos de alta inflación tales como choques temporales o persistentes en los déficits fiscales y el desanclaje en las expectativas de inflación. La secuencia estimada de déficits monetizados permite explicar el comportamiento de la inflación entre 1969-94. Este documento extiende el modelo para incorporar la posibilidad que la política fiscal pueda influir las expectativas de inflación en un contexto de independencia del Banco Central, caso de México desde 1994. Se presenta evidencia que sugiere que las fluctuaciones en el tipo de cambio así como en el diferencial de tasas soberanas EMBI influyen sobre la evolución de la inflación. Palabras Clave: Inflación, Expectativas de Inflación, Déficit Fiscal *Este documento es parte de la Red de Investigación Conjunta 2017 del CEMLA. Estamos especialmente agradecidos con Daniel Chiquiar y con Andrea Tambalotti, nuestro asesor académico, por sus comentarios en el transcurso de este proyecto. Agradecemos, por sus comentarios, a Nicolás

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“…Such independent banks can constrain the government through threats of interest rate increases or actual rate hikes, and by refusing to lend to the government. 10 While early evidence on the connection between CBI and fiscal deficits is mixed (Grilli et al, 1991, Franzese, 2002, more recent evidence shows that when the central bank can credibly focus on inflation, it deters deficit spending (Bodea, 2013;Bodea & Higashijima, 2017).…”

Section: Central Bank Independencementioning

confidence: 99%

Sovereign credit ratings and central banks: Why do analysts pay attention to institutions?

Bodea

Hicks

2018

Economics & Politics

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This paper studies the effect of the governance of modern central banks on the ratings assigned by the credit rating agencies Standard and Poor's and Moody's. Until recently, the rating process was not public. Even still, the factors or precise methodologies used by the agencies remain uncertain and analyst judgment remains important. We argue that, given uncertainty over the future paths of countries, the quality of the central bank governance serves as a useful heuristic for a stable and favorable country trajectory. In particular, the central bank's independence signals that the government is committed to general macroeconomic stability, including debt repayment. Additionally, central bank transparency clarifies who is the principal of the bank and provides information about how the central bank understands the economy and monetary policy. Finally, tensions between the central bank and the government, as reflected by irregular turnover of central bank governors, raise doubts about countries' future prospects. Empirically, we use a variety of models, including mediation analysis, to ensure that the effect we identify stems from the central bank governance itself, as a heuristic for the future paths of countries, and not the central bank's direct contribution to the macroeconomy, as reflected in the available data.

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Central Bank Independence and Fiscal Policy: Can the Central Bank Restrain Deficit Spending?

Cited by 83 publications

References 85 publications

Economic Institutions and Autocratic Breakdown: Monetary Constraints and Fiscal Spending in Dominant-Party Regimes

Economic Institutions and Autocratic Breakdown: Monetary Constraints and Fiscal Spending in Dominant-Party Regimes

Fiscal Policy and Inflation: Understanding the Role of Expectations in Mexico

Sovereign credit ratings and central banks: Why do analysts pay attention to institutions?

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