Year: 2010
Type: article
Abstract: This dissertation answers the following question: What are the determinants of central bank independence (CBI) in developing countries? I argue that in developing countries CBI is the product of vulnerable governments trying to attract foreign investors and creditors. Incumbents' vulnerability increases when they experience need for capital. I define need for capital as the presence of growth problems, coupled with losses of FDI or high levels of foreign debt. Countries needing capital have to either attract investment or borrow funds in the international market. Because developing countries cannot rely on their reputation to attract capital, they need to signal their commitment to stable economic policy. I argue that CBI is one of the principal signals that international investors and lenders ask for. Therefore, I expect that as the need for capital increases, developing countries will accommodate the demands of international actors. This occurs independently of the preferences of domestic actors. However, the capacity of a government to respond to international incentives and pressures through CBI is determined by an institutional context that makes institutional change more or less costly. Focusing on presidential systems, I expect that two factors condition the elasticity of governments' responses to international incentives: the capacity of the actors in the inter-institutional bargaining (president and congress), and the preference distance between the two branches of government.I present evidence suggesting that need for capital has the opposite effect in developed and developing countries' changes in CBI. Developing countries respond to need for capital with CBI increases. Changes in CBI are also affected by the expected credibility of the signal. The findings with regard to the domestic level of the theory are mixed: although presidential powers, congress capabilities and preference distance affect the likelihood of central bank reform, they do not affect it in the direction that was expected by the theory. Finally, the case studies provide a closer look at the process of central bank reform in Argentina and Brazil. An analysis of the reforms affecting CBI, and of instances of lack of reform, provides qualitative evidence of incumbents' motivations for and obstacles against central bank reform.
Author: Ana Carolina Garriga
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2099077755