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Political economy behind central bank independence

Anastasia Burkovskaya

Journal of Macroeconomics, 2019, vol. 61, issue C, -

Abstract: This paper proposes a model that analyzes the reasons behind the establishment and persistence of central bank independence (CBI) in a competitive democracy where both incumbent and opposition parties have the right to veto the delegation of monetary policy. We show that in a country with a high level of corruption, the opposition party uses the absence of CBI to keep the economy unstable to increase its own chances of getting elected. The model also predicts persistence of CBI once it is established, due to the incumbent’s fear of losing the office if the autonomy is removed.

Keywords: Central bank independence; Political business cycles; Democracy (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.jmacro.2019.103121

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Handle: RePEc:eee:jmacro:v:61:y:2019:i:c:10