The political economy of IMF conditionality and central bank independence

Bernhard Reinsberg, Andreas Kern () and Matthias Rau-Göhring

European Journal of Political Economy, 2021, vol. 68, issue C

Abstract: International organizations (IOs) often drive policy change in member countries. Given IOs' limited political leverage over a member country, previous research argues that IOs rely on a combination of hard pressures (i.e., conditionality) and soft pressures (i.e., socialization) to attain their political goals. Expanding this literature, we hypothesize that IOs can enhance their political leverage through loan conditions aimed at enhancing the political independence of key administrative units. Studying this mechanism in the context of the International Monetary Fund (IMF), we argue that through prescribing structural loan conditions on central banks (CBI conditionality), the IMF empowers central banks to gain more political leverage with the aim to limit a government's ability to (ab)use monetary policy for political gain. Divorcing monetary authorities from their respective government, the IMF intends to alter political dynamics towards achieving greater program compliance and enhance long-term macro-financial stability. Relying on a dataset including up to 124 countries between 1980 and 2012, we find that the IMF deploys CBI conditionality to countries with fewer checks and balances, a less independent central bank, and where the government relies more heavily on the monetization of public debt.

Keywords: IMF; IMF Conditionality; Central bank independence; Political economics (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 F33 F34 F53 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:poleco:v:68:y:2021:i:c:s017626802030135x

DOI: 10.1016/j.ejpoleco.2020.101987

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