Central bank independence and sovereign debt crisis. Any link?

Kari Heimonen and Aleksandra Masłowska-Jokinen
Additional contact information
Kari Heimonen: School of Business and Economics, University of Jyvaskyla

No 93, Discussion Papers from Aboa Centre for Economics

Abstract: In this paper we ask if central bank independence could lead to a bad fiscal position of some countries. Introducing autonomous central bank without changing other policy habits could expose the country to greater temptation to borrow money. We think that introducing high degree of CBI creates illusion that these countries are of similar credibility as a borrower. It opens new possibilities to borrow money and to increase consumption, thus leading to greater indebtedness. We analyse if the size of improvement in CBI was connected with country's increase in debt. We hypothesise that some countries could misuse the benefits coming from CBI, would not introduce discipline in other parts of economic policy and not only continue spending but also increase their volumes thanks to wider options for borrowing. Panel data estimations results using EMU-14 confirm our hypotheses. Greater increase in CBI was related to greater increase in debt, both public and private. These results are confirmed with alternative models and varying definitions of central bank independence.

Keywords: central bank independence; sovereign debt; private debt; sound money; panel data (search for similar items in EconPapers)
JEL-codes: C33 E02 E58 E61 (search for similar items in EconPapers)
Pages: 29
Date: 2014-07
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://ace-economics.fi/kuvat/dp93.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tkk:dpaper:dp93

Access Statistics for this paper

More papers in Discussion Papers from Aboa Centre for Economics Contact information at EDIRC.
Bibliographic data for series maintained by Susmita Baulia ().