Scandinavian Working Papers in Economics

HUI Working Papers,
HUI Research

No 13: Why Do Politicians Implement Central Bank Independence Reforms?

Sven-Olov Daunfeldt (), Jörgen Hellström () and Mats Landström ()
Additional contact information
Sven-Olov Daunfeldt: The Swedish Retail Institute (HUI), Postal: Regeringsgatan 60, 103 29 Stockholm, Sweden
Jörgen Hellström: Department of Economics, Postal: Umeå University, SE-90187 Umeå, Sweden
Mats Landström: Department of Economics, Postal: University of Gävle, SE-801 76 Gävle, Sweden

Abstract: It is something of a puzzle that politicians around the world have chosen to give up power to independent central banks, thereby reducing their possibilities to fine-tune the economy. In this paper the determinants of central bank independence (CBI) reforms are studied using a new data set on the possible event of such reforms in 119 countries. According to the data, as much as 81 countries had implemented CBI-reforms during the study period. The results indicate, moreover, that policymakers are more likely to delegate power to independent central banks when the foreign debt is relatively high. In non-OECD countries, the likelihood of a CBI-reform also seems to increase when policymakers face a high probability of getting replaced.

Keywords: Central bank independence; political economy

JEL-codes: E42; E58; E61; P16

34 pages, February 29, 2008

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