The Political Economy of Reforms in Central Bank Design
By Davide Romelli | Posted on 25 September 2021
Post type: Paper
What explains the worldwide changes in central bank design over the past five decades? Using a new dataset on central bank institutional design, this paper investigates the timing, pace and magnitude of reforms in a sample of 155 countries over the period 1972-2017. I construct a new dynamic index of central bank independence and show that initial reforms that increase the level of independence, as well as regional convergence, represent important drivers of changes in central bank design.
Similarly, external pressures, such as obtaining an IMF loan, and political events, such as democratic reforms and the election of nationalistic governments, also impact the reform process.
Reforms also follow periods of high inflation rates suggesting an endogeneous evolution of central bank independence. The results also reveal important heterogeneities in the reform process depending on the level of development, the size and direction of reforms, as well as the different dimensions along which central bank legislation can be amended.