The Lives of Debt: Central Banking and Debt Management in Emerging Markets

• In Event: The Political Economy of Finance in Developing Countries

Abstract

The political economy literature has long inquired about the policy impact of "central bank independence", a relatively ambiguous institutional parameter for insulating economic policy from political demands. The same logic inspired initiatives to make debt management more autonomous from other entities located inside Ministries of Finance. Sovereign debt management that is independent of monetary policy would signal to financial markets and domestic constituencies that governments were indeed committed to lower borrowing costs, indicating that a country is much less likely to engage in irresponsible indebtedness, in order to suit political goals. Despite the growing scholarship in both areas – increasingly skeptical of central bank independence as a viable goal and more descriptive of contextual determinants of debt management strategies in different countries – seldom have both institutional arrangements been analyzed in concert. Keeping debt management and central banking in separate silos may mimic the ways in which they have been institutionalized, yet, we argue, can be analytically misleading. By tracking a common tool between the two endeavors in question, namely sovereign bond transactions, we investigate the extent to which central banking and debt management practices complement and/or contradict one another in both intended and unintended ways. We focus on Mexico, Brazil and India where central bank “independence” ranges from constitutionally-determined, ambivalent and wishful, respectively. This variety is then matched by less systematically-investigated debt management arrangements. Insofar as debt is issued not only to finance public expenditure but also serves as a key mechanism for open market operations, this analysis unpacks the “lives of debt”, revealing its key functions in monetary policy in distinct institutional contexts. Ultimately, the paper aims to contribute to studies on the political economy of sovereign debt by adding more institutional depth to analyses of state-market interactions that tend to see government policy choices as homogeneously set, even if constrained by external agents and conditions. In contrast, we see these choices as more diverse and potentially contradictory, a product of internal political and/or bureaucratic disputes.

Authors

• Giselle Datz, Virginia Tech

• Maria Antonieta Del Tedesco Lins, University of Sao Paulo