Inside a Black Box - The Political Economy of Central Banking in Autocracies

• In Event: Central Banks and Their Objectives

Abstract

Autocrats are concerned with exercising political control over economic rents and resources. An important layer of political control are financial activities in a country. It is abundantly documented that the ability to determine who gets credit under what conditions forms an important layer of shaping the economic and political structure of a country. As central banks provide the single most powerful segway between a government and the financial system, we hypothesize that central banking in autocracies is not about walking the fine line between inflation and output, but about steering the allocation of credit to exercise political control. In particular, we argue that securing the control over monetary authorities is quint-essential in maintaining the political viability of an autocratic regime. First and foremost, an autocrat's central banker can steer credit towards loyal business elites and constrain the emergence of an entrepreneurial class challenging the political status quo. Second, seizing control over a central bank equips a regime with a flexible spending account and offers endless opportunities for looting a country. Finally, to ground inflation at manageable levels, autocrats often opt for a rigid/fixed exchange rate regime and thereby push their central bank into ever greater financial repression to maintain price stability. To decipher these reinforcing mechanisms, we apply a mixed methods approach. Relying on a combination of large N evidence and case studies, we demonstrate the viability of these theoretical mechanisms.

Authors

• Andreas Kern, Georgetown University

• Jack Seddon

• Michael Aklin, University of Pittsburgh

• Ning Leng, Georgetown University