Central Bank Behavior in Contemporary Civil Wars

• In Event: Conflict Processes and Finance

Abstract

During wartime central banks ensure conflicts are funded by managing war debt, control the costs of war via interest rates, maintain a balance of payments and exchange rate stability, and guard against capital flight. These efforts are highly consequential: they have implications for war outcomes, the cost of war, leadership tenure, relations among states, and postwar economic recovery. Yet despite the importance of central banks, political scientists and economists have overlooked how they perform during wartime. The few works that explore central banks during war emphasize developed economies in democratic states during the gold standard. This work not only fills the lacuna in the conflict management and central banking literatures, but also goes farther by focusing on central banks during civil wars. During civil wars, often in emerging market economies characterized by nondemocratic regimes, the central bank mandate is complicated by threats to physical infrastructure, a civil service bureaucracy that may or may not be loyal to the existing regime or incompetent due to civil service turnover, and regime change. This paper models central bank behavior during civil wars amid multiple constraints and competing priorities. We argue that the degree to which central banks are able to prioritize their central banking goals as well as meet them.

Authors

• Rosella Cappella, Boston University

• Michael H. Woldemariam, Boston University