Autocratic Central Banks and Monetary Policy Credibility

• In Event: New Perspectives on Central Banking

Abstract

This paper assesses the conditions under which autocracies delegate de jure autonomy to central banks. It is known that autocracies on average have lower legal central bank independence (CBI) than democratic states. Since policymaking in autocratic states tends to be much more opaque and subject to fewer checks and balances, it is difficult for autocratic central banks to signal that they are operating free from government interference. However, in practice, central bank autonomy varies widely across autocratic states. This raises puzzling questions about monetary policy in dictatorships. First, if it is true that de jure CBI lacks credibility in these states, then why would they ever implement costly CBI reforms? I argue that structural factors within autocratic regimes influence both the possibility of CBI reform and its credibility. First, CB autonomy requires authoritarian governments to have long time horizons. Secondly, higher political competition and the presence of organized opposition are associated with lower CBI. This is because autocratic leaders fear that independent central banks may benefit the opposition. Thus from the point of view of autocratic leaders, CBI reform is “riskier” in certain types of autocracy. Where leaders have longer time horizons and face less political competition, they are more willing to provide central banks with autonomy in order to increase appeal to investors. In addition, given these arguments, I assess whether there are ways for autocrats to increase the de facto credibility of central bank independence in the eyes of investors. Here, I argue that in order to gain credibility, CBI reform needs to occur in conjunction with other institutional mechanism that have the power to constrain a dictator, such as binding legislatures. My empirical analysis makes use of newly available data on CBI by Garriga (2016) as well as new data on authoritarian regime characteristics by Geddes, Wright, and Frantz (2017).

Author

• Susanne Mueller-Redwood, University of Wisconsin, Madison