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The Effectiveness of Macroeconomic Commitment in Weak(er) Institutional Environments

Marc Quintyn and Sophia Gollwitzer

No 10/193, IMF Working Papers from International Monetary Fund

Abstract: This paper analyzes the institutional conditions affecting the establishment and effectiveness of independent central banks and of budgetary institutions. It draws on the recent theory developed by North, Wallis and Weingast on the transition from a closed and fragile state to an open economic and political environment. The paper presents a composite indicator allowing for the identification of a country’s position along this transition path. The findings suggest that (i) while the establishment of autonomous central banks seems to be relatively independent from the broader institutional framework, sound budgetary institutions tend to be established in countries with higher levels of rule of law for the elites, and (ii) while central bank independence is effective in reducing inflation irrespective of a country’s position along the transition path, budget institutions seem to be most effective as a disciplining device in weak institutional environments.

Keywords: Central bank independence; Central bank autonomy; Central banks and their policies; Central banks; Developed countries; Budgetary institutions; Budgetary policy; Low-income developing countries; Monetary policy; Governance; Fiscal policy; Political economy; Macroeconomic Commitment Institutions, Political-Economic Institutions, inflation, central bank, monetary fund, monetary union, The Effectiveness of Macroeconomic Commitment, Fiscal and Monetary Policy in Development, Capitalist Systems: Political Economy, Other Economic Systems: Other, Doorstep Conditions, (search for similar items in EconPapers)
Pages: 59
Date: 2010-08-01
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-pol
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Handle: RePEc:imf:imfwpa:10/193