XXV Edition

1-2 December 2016"

The Political Economy of Reforms in Central Bank Design: Evidence from a New Dataset

Romelli Davide, University of Dublin

What accounts for the worldwide changes in central bank design over the past four decades? Using a new and comprehensive dataset on central bank institutional design, this paper employs a political economy perspective to explain the timing, pace and extent of reforms in central banking. I build a dynamic central bank independence index that extends previous indices by (i) capturing the changes in central bank legislative reforms over time, and (ii) including a larger set of characteristics that may influence the degree of central bank independence. This index is then used to investigate the determinants of central bank reforms in a sample of 65 countries over the period 1972-2014. I show that incentives generated by initial reforms which increased the level of independence, as well as a regional convergence, represent important drivers of reforms in central bank design. At the same time, an external pressure to reform, such as obtaining an IMF loan or joining a monetary union, also increases the likelihood of reforms, while government changes or crises episodes have little impact. These results are robust to controlling for the size and magnitude of reforms, as well as to alternative indices of central bank independence.

Area: Monetary Policy and Central Banking

Keywords: Central banks, central bank independence, central bank governance, legislative reforms.

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