Assessing Central Bank Independence in Developing Countries: Do Actions Speak Louder Than Words?

Maxwell J Fry

Oxford Economic Papers, 1998, vol. 50, issue 3, 512-29

Abstract: The author's fiscal dominance hypothesis of central bank independence posits that the size of the government's deficit and the methods by which it is financed determine central bank independence in developing countries. He measures central bank independence by the extent to which a central bank neutralizes the effects of increased credit demands by the government on the money supply by reducing credit to the private sector. The author's estimates show that larger deficits and greater government reliance on the domestic banking system are associated with less central bank neutralization of increased government borrowing from the banking system. Copyright 1998 by Royal Economic Society.

Date: 1998
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