The Political Economy of IMF Conditionality and Central Bank Independence.

• In Event: Domestic Politics and the International Monetary Fund

Abstract

The IMF plays a vital role in promoting central bank independence (CBI). Besides providing technical assistance for the implementation of CBI, the IMF often requires governments to implement reforms in the conduct of monetary policy. However, it is unclear why and under what circumstances the IMF would push for CBI? Although we do not dismiss the idea that CBI conditionality is a standard instrument in the IMF's toolbox promoting liberal institutions, we argue that CBI conditionality is primarily driven by practical considerations. First, through pushing for CBI, the IMF tries to mute speculative pressures on the balance of payments and thus work towards a short-run stabilization of the economy. Second, as IMF loans are directly disbursed to monetary authorities, demanding CBI, the IMF tries to contain the leakage of these funds. Finally, CBI conditionality provides a powerful instrument to establish an effective veto player to push for the implementation of its policy agenda in the borrowing country. Although these practical considerations apply to almost all borrowing countries, we hypothesize that the IMF requests CBI conditionality from those countries where it has more bargaining power. To test these theoretical predictions, we compile a unique dataset that includes detailed information on CBI reforms and IMF conditionality for up to 124 countries between 1980 and 2014. We complement this analysis with qualitative evidence from country case studies. Our findings support the notion that the IMF prioritizes practical over ideological considerations when engaging in monetary institution building.

Authors

• Andreas Kern, Georgetown University

• Bernhard Reinsberg, University of Cambridge