Banking on Independence? Central Bank Independence in Authoritarian Regimes

• In Event: Economic Change and the Welfare State

Abstract

Central bank independence (CBI) has become the norm for modern central banks. CBI promotes a rules-based monetary policy, limiting policymaker discretion, and promoting price stability (Friedman 1962; Rogoff 1985; Grilli et al 1991; Alesina and Summer 1993; Eijffinger and De Haan 1996; Issing 2006). Central bank independence is studied widely among industrial democracies (Bade and Parkin 1988; Grilli et al. 1991; Eijffinger and Schaling 1993; Arnone and Romelli 2013), among transition and developing economies (Loungani and Sheets 1997; Cukierman et al. 2002; Maliszewski 2003; Garriga and Rodriguez 2020), and at a general systemic level (Cukierman et al. 1992). However, less is understood about why authoritarian regimes grant independence to central banks. Indeed, CBI is not uncommon among authoritarian regimes. However, the degree of central bank independence varies among these regimes further raising questions of why some opt for CBI while others maintain government control. This paper explores domestic and international variables that lead authoritarian regimes to select higher levels of CBI. I argue that while domestic variables such as regime type are important, international factors including openness to trade and the level of foreign direct investment have a greater significance in determining CBI in authoritarian regimes. Authoritarian regimes are generally committed to economic growth for reasons ranging from poor economic performance leading to popular unrest and possible revolt to the need for resources to pay rents to regimes allies. One means to achieve economic growth is through access to financial markets (Miller 1998; Pagano 1993). However, in accessing international financial markets, authoritarian regimes face the problem of commitment. Without domestic institutions to tie the hands of the regime, investors will be wary of committing resources to an unstable domestic economy (Arias et al. 2018). CBI can serve as a signal of a stable economic environment for investment to investors and credit rating agencies by authoritarian regimes, which otherwise lack democratic institutions to hold governments to account.

My research contributes to the growing scholarship examining how authoritarian regimes engage in the international economy. Within IPE, a growing literature discusses why authoritarian regimes participate in or adopt institutions that limit their control. Scholars have explored what variables influence authoritarian regimes level of openness to trade (Hankla and Kuthy 2013; Wu 2015), decisions to select fixed or floating exchange rate regimes (Steinberg and Malhotra 2014) or sign bilateral investment treaties (Mazumder 2015; Bastiaens 2016; Arias et al. 2018). However, a gap exists in understanding why these same regimes opt for central bank independence.

Author

• Corinne Tomasi, University of Florida