Popular in Political Science

American Politics

Keeping the Republic

Boston College Marc Landy

British Politics

Entrepreneurial thinking: the politics and practice of policy impact

University of Sheffield Matthew Flinders

Canadian Politics

Parties and Elections: An End to Canadian Exceptionalism?

St. Francis Xavier University James Bickerton

Asian Politics

The Politics of Knowledge in Development

University of Delhi Madhulika Banerjee

American Politics

Fifty years of declining confidence and increasing polarization in trust

University of California Berkeley Henry Brady

American Politics

The Opening Dilemma

Cornell University Richard Bensel

Political Economy

Wait and See?

University of Liverpool Mariaelisa Epifanio

The political economy of reforms in Central Bank design

View more insights in Social Sciences - Political Science - Political Economy

View more figures from Trinity College Dublin

View the page of Davide Romelli

Read the Study

Next in Political Economy

Populism in Place: The Economic Geography of the Globalization Backlash

Lawrence Broz | UC San Diego

UK aid to Africa

Melita Lazell | University of Portsmouth

What explains the worldwide changes in central bank design over the past five decades? Davide Romelli discusses new dynamic index of central bank independence and show that status quo, as well as regional convergence, represent important drivers of changes in central bank design.

Image courtesy of interviewee. January 29, 2024

Log-in or Sign-up to Faculti
Currently viewing this subject insight as a guest. You have insight(s) remaining for this month. Login to view 8000+ figures on the platform.

Generating Workspace...

Export as PDF

The paper discusses the significant reforms in central banking over the past 50 years, focusing on the relationship between central bank independence (CBI) and macroeconomic variables. The author notes existing literature suggests a negative relationship between CBI and inflation, particularly in advanced economies. However, previous studies often overlooked CBI as an endogenous variable, failing to address the contextual factors driving reforms in central bank institutional design.

The author's research, which involves a dataset covering 154 countries from 1972 to 2017, aims to identify the drivers of these reforms by incorporating a comprehensive analysis of central bank legislations. The methodology includes creating an index of CBI that reflects contemporary developments and characteristics not considered in older indices.

The findings reveal that countries experiencing lower levels of independence are more likely to reform. External pressures, such as IMF programs and convergence requirements for joining monetary unions, significantly influence the likelihood of reform. Interestingly, the study identifies peer effects, where countries lagging behind in CBI are driven to catch up with their peers.

The implications of the research highlight the importance of considering the endogeneity of CBI when analyzing its effects, suggesting that reforms are contingent upon political and economic contexts. The results contribute to the understanding of the political economy of reforms by emphasizing that institutional changes evolve based on dynamic conditions rather than being fixed or exogenous.

Language:

Export as PDF

X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

00:00.105 --> 00:03.525
The context of this paper stems from, the large number

00:03.545 --> 00:06.605
of reforms that took place, among central banks

00:06.605 --> 00:09.165
around the world over the last, 50 years.

00:09.665 --> 00:12.725
So, just to give you the context of this project started,

00:13.145 --> 00:16.485
my, this project was motivated by my interest in trying

00:16.485 --> 00:19.285
to, reestablish the link

00:19.325 --> 00:21.085
between Central Bank independence

00:21.085 --> 00:22.765
and other macroeconomic variables,

00:22.765 --> 00:25.565
which had been largely studied, start,

00:25.565 --> 00:26.725
since the, the nineties.

00:27.265 --> 00:30.405
Um, so by reviewing this literature, I, I noticed

00:30.475 --> 00:34.005
that there was an extensive literature, trying

00:34.005 --> 00:36.245
to understand the, the, the relationship

00:36.245 --> 00:39.885
between central bank independence and inflation,

00:40.185 --> 00:42.085
but also other macroeconomic variables.

00:42.345 --> 00:43.845
So this literature came

00:43.845 --> 00:47.205
to a almost clear conclusion on the fact that there existed,

00:47.505 --> 00:50.805
negative relationship between central bank independence

00:51.265 --> 00:54.885
and inflation, especially among, advanced economies.

00:55.275 --> 00:58.765
However, one of the, the main drawback of this literature,

00:58.765 --> 01:01.565
from my point of view, was related to the fact that,

01:01.795 --> 01:03.325
none of these, the studies

01:03.395 --> 01:06.725
that I've seen published in this literature were actually

01:07.325 --> 01:09.965
considering, the degree of central bank independence

01:09.985 --> 01:13.405
as an endogenous variable in the sense that, all

01:13.405 --> 01:16.525
of the papers were taking Central Bank independence

01:16.525 --> 01:19.125
as given, while not, trying

01:19.125 --> 01:21.765
to understand which were the, political

01:21.765 --> 01:24.645
or economic drivers of reforming central bank,

01:24.645 --> 01:25.845
institutional design.

01:26.385 --> 01:30.365
So I started this paper by, with an ambitious aim of,

01:30.545 --> 01:34.205
proposing the first study on, the drivers

01:34.385 --> 01:36.925
of reforming central bank institutional design

01:37.345 --> 01:38.965
for a large set of countries, which,

01:39.065 --> 01:41.685
and I ended up having a final sample

01:41.745 --> 01:46.645
of 154 countries over the period, 1972,

01:46.825 --> 01:48.605
up until, 2017.

01:49.065 --> 01:52.245
The dataset, here is a, a little disclaimer.

01:52.445 --> 01:56.325
I, I'm, I am, so the, the, the replication, data for,

01:56.425 --> 01:58.725
for the paper already available online,

01:58.785 --> 02:00.845
but I'm, I will sure,

02:00.845 --> 02:03.205
shortly release also the entire database

02:03.225 --> 02:04.445
in terms of legislation.

02:04.865 --> 02:07.525
And, the, the motivation is related to the fact

02:07.525 --> 02:09.805
that in order to create my database,

02:09.985 --> 02:12.205
the first exercise I had, I had

02:12.205 --> 02:14.965
to do was basically collect all the central

02:14.995 --> 02:16.245
bank legislations, right?

02:16.625 --> 02:19.965
And so when we think about data collection, is, is easy.

02:20.105 --> 02:23.245
For example, if we want to collect data from, GDP

02:23.585 --> 02:27.045
to go on IMF or the World Bank websites, download this data

02:27.185 --> 02:28.805
and implement our analysis.

02:28.875 --> 02:31.805
However, for Central Bank legislations,

02:32.305 --> 02:34.965
not even the Central Bank's websites,

02:34.995 --> 02:36.645
were providing the legislation.

02:36.665 --> 02:41.165
So if we think about a sample of around 150 countries,

02:41.165 --> 02:43.445
it'll be easy to, open the link

02:43.545 --> 02:45.885
to the Central Bank websites, go under,

02:46.395 --> 02:48.765
legislation section and download this document.

02:48.875 --> 02:52.205
Unfortunately, this was a, a more tedious exercise

02:52.205 --> 02:56.005
because, what, during the, the years of my PhD,

02:56.445 --> 02:58.605
I first had to collect, this

02:58.605 --> 03:02.405
Legislation by con contacting not only the central bank,

03:02.425 --> 03:04.925
but also other, governmental institutions.

03:05.385 --> 03:09.325
And so I first, collected this large database of around,

03:09.545 --> 03:11.765
2,500 documents.

03:12.345 --> 03:15.205
And, and, once the data collection

03:15.305 --> 03:18.565
or the, the legislation collection was implemented,

03:19.005 --> 03:22.765
I asked myself, how can I, create a measure

03:22.785 --> 03:24.205
of central bank independence,

03:24.205 --> 03:26.485
which is inclusive in the sense that it's able

03:26.545 --> 03:28.925
to capture not only the information

03:28.955 --> 03:32.445
that were the main characteristics of Central Bank as

03:32.445 --> 03:35.205
of the 1990s, when these first indexes

03:35.205 --> 03:37.645
of central bank independence were created,

03:37.825 --> 03:39.205
but also contemporaneous.

03:39.905 --> 03:42.965
And so, my start, the starting point,

03:43.065 --> 03:45.965
for the creation of my index was first of all, try

03:45.965 --> 03:49.045
to identify the main characteristics which were present in

03:49.045 --> 03:53.005
the Greeley machine, Rini paper that was published in 1991,

03:53.385 --> 03:58.045
and the procure, webinar Apti paper published in 1992.

03:58.345 --> 04:02.005
And then also incorporate, so extend these indexes

04:02.075 --> 04:03.325
with more characteristics,

04:03.625 --> 04:06.285
and also incorporate some of the characteristics,

04:06.285 --> 04:07.765
of central bank design,

04:07.765 --> 04:09.685
which were not present in the nineties.

04:09.985 --> 04:13.445
And importantly, these characteristics were represented

04:13.505 --> 04:15.965
by Central Bank financial independence,

04:15.965 --> 04:17.925
which became important, especially

04:17.925 --> 04:19.485
after the global financial crisis

04:20.105 --> 04:24.365
and, central bank accounting and, reporting

04:24.365 --> 04:25.845
and disclosure more in general.

04:26.905 --> 04:29.885
And so, once I've defined, just to give you a little

04:29.905 --> 04:32.565
of the story of how I, I did basically

04:32.665 --> 04:33.925
for every central bank

04:34.225 --> 04:38.605
and for every legislation, I did an extensive review

04:38.605 --> 04:41.485
of all the literature on Central Bank, accountability,

04:41.485 --> 04:42.925
independence, and transparency.

04:43.485 --> 04:46.005
I came up with a list of 160 questions.

04:46.005 --> 04:49.725
So I end a cheat sheet for every, legislation

04:50.265 --> 04:53.485
and for every legislation, I had a sense of questions

04:53.825 --> 04:56.965
and various options, which are categorical variables,

04:56.965 --> 04:59.125
which will allow me basically to,

04:59.655 --> 05:01.445
understand the different decrees

05:01.445 --> 05:03.325
of central bank independence of a country.

05:03.785 --> 05:07.045
And so, once I, collected all these information,

05:07.325 --> 05:10.445
I needed actually to convert these categorical variables

05:10.515 --> 05:11.805
into a real index, right?

05:12.225 --> 05:16.725
And so, the first thing, I, I, I needed to do is

05:16.945 --> 05:19.525
to trim down the set of questions to those

05:19.525 --> 05:23.485
that were possible to be quantified, rather than a yes

05:23.485 --> 05:25.445
or no or descriptive questions.

05:25.865 --> 05:29.845
And so I came up with a final list of 42,

05:30.075 --> 05:33.045
subcategories, which were divided into six

05:33.075 --> 05:34.685
broader, areas.

05:35.225 --> 05:38.965
So the six broader areas included, the classical areas,

05:39.225 --> 05:41.085
that were the four classical areas

05:41.085 --> 05:44.085
that were already discussed in previous indexes, which were,

05:44.625 --> 05:45.685
central bank,

05:45.985 --> 05:48.925
all the characteristics on central bank governance,

05:49.645 --> 05:52.565
monetary policy implementation, the central bank objective,

05:52.745 --> 05:54.325
and lending to the governments,

05:54.495 --> 05:58.005
which were present in both the Greeley machine, notit, Bini,

05:58.005 --> 06:00.485
and the procurement web, web and AAPT paper.

06:00.945 --> 06:04.405
And then what I also did, I added this new subsection

06:04.665 --> 06:07.205
or two dimension, on,

06:07.205 --> 06:09.925
central bank financial independence and accountability.

06:11.955 --> 06:15.775
And so once I had this, this data, I actually try

06:15.775 --> 06:20.255
to understand where, how can we identify reforms, right?

06:20.355 --> 06:24.055
As I said before, every time a legislation changed, right?

06:24.315 --> 06:26.455
Not only a new legislation was enacted,

06:26.455 --> 06:28.975
but also an amendment was brought to the legislation,

06:29.055 --> 06:30.935
I basically recomputed my index, right?

06:31.475 --> 06:34.935
And so, being able to, to make this process automatic,

06:35.095 --> 06:37.055
I was actually able to look at,

06:37.115 --> 06:38.495
the variation in the index

06:38.715 --> 06:40.735
and identify the number of reforms.

06:40.955 --> 06:42.775
So this allowed me for the sample

06:42.795 --> 06:45.975
of 155 countries in my sample, to have

06:46.155 --> 06:49.255
to identify the largest number of reforms,

06:49.255 --> 06:52.735
which could ever be, identified in, in the literature.

06:53.045 --> 06:56.335
When, I had a total number of,

06:56.715 --> 07:01.375
286 reforms implemented, over the period

07:01.375 --> 07:05.095
of my analysis, the data collection parts took a large,

07:05.395 --> 07:07.415
amount of, of my time during the PhD.

07:07.595 --> 07:10.455
But afterwards, what I tried to, I wanted

07:10.455 --> 07:12.695
to do was actually to try to understand,

07:13.075 --> 07:14.135
which were the drivers.

07:14.315 --> 07:15.855
So I, I use, the,

07:15.875 --> 07:18.775
the large literature in the political economy of reform.

07:18.775 --> 07:21.895
And so try to understand not only on central bank,

07:22.075 --> 07:24.695
design, but also on other characteristics of a country

07:24.955 --> 07:27.095
to understand, which could be the, the elements

07:27.095 --> 07:28.815
that influence reforms, right?

07:29.235 --> 07:33.055
And so I started collecting, possible, drivers

07:33.315 --> 07:35.855
and possible, elements that my influence.

07:35.955 --> 07:39.815
And so, among the characteristics I, I, I started,

07:39.815 --> 07:42.495
that were present in this literature, there was the evidence

07:42.495 --> 07:46.815
that the status quo bias, so the level of, independence

07:47.035 --> 07:49.535
or the level of, development

07:49.535 --> 07:52.655
of a country might influence, the propensity

07:52.675 --> 07:54.055
and the trade off implement

07:54.055 --> 07:55.695
of implementing our reform, right?

07:55.795 --> 07:58.255
So the first measure of status quo bias

07:58.255 --> 08:01.455
that is used in the paper is the lag level of,

08:01.485 --> 08:02.855
central bank independence.

08:03.275 --> 08:04.855
But other elements are important.

08:05.115 --> 08:07.215
So when it comes to national

08:07.275 --> 08:11.095
and international, institutions, we know that, some

08:11.735 --> 08:14.415
external pressure, comes at play, right?

08:14.635 --> 08:17.375
So there are already established paper in the literature

08:17.375 --> 08:19.655
that we're suggesting that, the,

08:19.655 --> 08:23.335
there is an important drivers of international organization,

08:23.625 --> 08:25.255
which can boost reforms.

08:25.405 --> 08:28.535
When we think about the extended Washington consensus,

08:28.555 --> 08:31.055
we know that typically, countries

08:31.055 --> 08:35.255
that re receive an IMF support are more, more likely to,

08:35.435 --> 08:38.295
to implement rebel liberalization reforms, right?

08:38.835 --> 08:42.335
And so, and a possible driver of,

08:42.515 --> 08:46.175
of reforming central bank design was, the effects on,

08:46.315 --> 08:47.415
creating sim.

08:47.415 --> 08:50.055
First of all, Adam Damion, whether the country,

08:50.195 --> 08:53.535
was under or, or not under, or not an IMF program.

08:53.915 --> 08:56.805
So this is the first measure of external inducement.

08:57.225 --> 09:00.925
Uh, another pressure that can come at play is the fact that,

09:01.025 --> 09:02.965
if we think a bit about, for example,

09:03.315 --> 09:06.005
Euro area countries, we know that in terms

09:06.105 --> 09:08.165
of four countries, in order to be able

09:08.165 --> 09:10.565
to join the Euro area, they need to follow certain

09:11.125 --> 09:12.805
convergence in the reform process.

09:13.025 --> 09:17.365
And so, being, a country which is eligible

09:17.365 --> 09:20.485
to enter a monetary union, we can have as a,

09:20.485 --> 09:22.845
an additional, element of pressure.

09:23.265 --> 09:27.325
And a final element of PR pressure is, is captured,

09:27.345 --> 09:31.205
by looking, for example, at the, the famous, paper

09:31.425 --> 09:35.165
by does democracy grow growth,

09:35.385 --> 09:39.365
on the peer pressures coming from, the, the lever, the,

09:39.505 --> 09:43.365
the distance between, the, the degree of independence

09:43.365 --> 09:45.205
of the central bank and,

09:45.385 --> 09:47.725
and the peers in their same regions, right?

09:47.785 --> 09:49.565
And so this is the, the third measures,

09:49.905 --> 09:51.605
but then there are other elements.

09:51.785 --> 09:54.565
Uh, so for example, there was this, idea,

09:54.745 --> 09:56.405
and there is, especially the

09:56.405 --> 09:58.965
after the global financial crisis that,

09:59.625 --> 10:03.125
people were asking on whether, crisis,

10:03.215 --> 10:04.725
cause or reforms, right?

10:04.785 --> 10:08.205
So it's easier to implement austerity measure

10:08.265 --> 10:10.365
or tough reforms during period of crisis.

10:10.505 --> 10:13.285
So I also control for measures such

10:13.285 --> 10:17.405
as hyperinflation periods, financial crisis,

10:17.885 --> 10:18.965
currency and debt crisis.

10:19.865 --> 10:22.285
And then, in the last part of the,

10:22.285 --> 10:26.405
the additional set of control, I also control for, the,

10:26.465 --> 10:27.805
the political institutions.

10:28.145 --> 10:31.205
Uh, so for example, for using the policy index,

10:31.225 --> 10:33.325
but also some economic characteristics.

10:33.425 --> 10:36.605
For example, the level of, debt to GDP

10:36.665 --> 10:38.285
and an index of globalization.

10:38.385 --> 10:42.885
So, in, in my point, from my point of view, I, I started

10:42.885 --> 10:45.965
with this agnostic view in trying to,

10:46.585 --> 10:49.325
not put any prior on what I would expect.

10:49.665 --> 10:53.045
Uh, I, I added these variables as a potential control,

10:53.465 --> 10:55.885
and I was curious even myself, to try

10:55.885 --> 10:59.365
to understand which could be the main drivers of reforms.

10:59.705 --> 11:02.205
The findings are, are pretty straightforward.

11:02.355 --> 11:07.295
They, they suggest that, the large number

11:07.355 --> 11:10.055
of robustness check that I have implemented,

11:10.375 --> 11:14.895
I find large evidence on the fact that both intern national

11:15.195 --> 11:17.015
and external, so internal

11:17.075 --> 11:19.775
and external factors are large driver of reforms.

11:19.995 --> 11:23.575
So there is an unconditional doubt on the fact that,

11:24.295 --> 11:25.375
countries that are more likely

11:25.475 --> 11:28.855
to reforms are those countries that are characterized

11:28.995 --> 11:31.175
by a lower level of independence.

11:31.635 --> 11:34.175
So we see these trend in independence,

11:34.175 --> 11:37.935
and so not surprisingly, we find that countries

11:37.935 --> 11:41.255
that are less, independent are the, the one

11:41.255 --> 11:42.855
that are more likely to reform.

11:43.315 --> 11:46.735
But at the same time, we also find that, countries

11:46.735 --> 11:48.695
that are under an IMF program

11:48.875 --> 11:52.495
or are, soon to, to be joining a monetary union,

11:52.875 --> 11:54.325
are more likely to reform

11:55.465 --> 11:59.605
and in line also with the paper, of h mog loan reforms.

12:00.025 --> 12:03.685
Uh, what we also find is that basically, countries

12:03.685 --> 12:07.165
that are characterized by a lower level of independence

12:07.185 --> 12:10.405
as compared to their peer, they are more likely to reform.

12:10.505 --> 12:12.645
So there is this idea of a peer effect

12:12.645 --> 12:15.125
or catch up effect that countries that are left

12:15.125 --> 12:17.925
behind in terms of independence, when it is the time

12:17.945 --> 12:20.485
to reform, they will be the one that are reforming their,

12:20.485 --> 12:21.765
their independence the most.

12:22.625 --> 12:25.565
And then there are also some, some other interesting facts

12:25.565 --> 12:27.165
that we can, we can find.

12:27.505 --> 12:31.445
We don't find much of a results when we look at the entire,

12:31.705 --> 12:36.205
process, of reforms driven by,

12:36.205 --> 12:38.325
global financial crisis,

12:38.505 --> 12:42.245
or, banking, currency crisis or type crisis.

12:43.435 --> 12:45.565
Undoubtedly, we find that,

12:46.045 --> 12:48.525
I hyperinflation episodes are associated

12:48.645 --> 12:49.885
with period of reforms.

12:50.265 --> 12:54.005
So, this happened in a few set of countries,

12:54.235 --> 12:57.085
when it, we narrow wrote down the analysis to,

12:57.665 --> 12:59.485
not only at the, at the magnitude,

12:59.585 --> 13:01.405
but also in the direction of reforms.

13:01.425 --> 13:04.125
We find that typically negative reforms

13:04.145 --> 13:08.605
or, re reversal in central bank

13:08.605 --> 13:11.645
independence are more likely to happen during a,

13:11.855 --> 13:16.045
after a financial crisis as it happened, during the,

13:16.585 --> 13:18.605
the post, global financial crisis.

13:19.185 --> 13:21.605
And, probably, the, some,

13:21.605 --> 13:24.085
there are some other elements that, that we can find.

13:24.145 --> 13:28.245
For example, when we look at the results, for,

13:28.605 --> 13:30.845
advanced economies, we find that,

13:30.845 --> 13:32.485
government changes are,

13:33.195 --> 13:36.405
important in driving reforming central bank independence.

13:37.025 --> 13:40.965
If you think about the United Kingdom in 1997,

13:41.975 --> 13:45.045
after the, the appointment of a new government,

13:45.055 --> 13:48.205
while when it comes to, developing countries, we find

13:48.205 --> 13:50.565
that, the results are mainly driven

13:50.705 --> 13:53.525
by the peer pressure coming from IMF programs.

13:53.985 --> 13:55.325
The conclusion of implication

13:55.345 --> 13:57.845
and implication of our paper, are,

13:57.845 --> 14:02.285
pretty straightforward, on top of, showing that,

14:02.665 --> 14:06.365
it is important to, when, when analyzing the degree

14:06.365 --> 14:08.405
of central bank independence of a country,

14:08.475 --> 14:12.565
it's also important to take into account, the, the,

14:12.565 --> 14:14.285
the endogeneity of these variables.

14:14.305 --> 14:15.845
So, the, the results

14:15.865 --> 14:18.805
and this dynamic index, which is publicly available online,

14:19.265 --> 14:22.405
should serve as a good instrument to,

14:22.465 --> 14:24.885
to capture the degree of central bank independence

14:25.145 --> 14:26.205
and more, Bo broadly.

14:26.465 --> 14:28.885
Our, this paper speaks to the,

14:28.885 --> 14:31.645
to the literature on the political economy of reforms,

14:31.985 --> 14:35.885
and basically shows that, political,

14:36.085 --> 14:39.085
institutions, right, are political

14:39.085 --> 14:41.685
and economic institutions such as, central banks

14:41.705 --> 14:45.645
or other, institutions are, are not, con,

14:45.645 --> 14:47.405
should not be always considered

14:47.405 --> 14:50.205
as a exogenous variable while implementing any type

14:50.205 --> 14:53.685
of analysis, but actually, their, their characteristics

14:53.705 --> 14:55.805
and their dynamics evolve endogenously,

14:55.805 --> 14:57.725
depending on the political

14:57.725 --> 14:59.885
and economic conditions of a country.

Reforming Central Bank Independence: A Global Study

00:00:00 - The context of this paper stems from, the large number of reforms that took place, among central banks around the world over the last, 50 years. So, just to give you the context of this project started, my, this project was motivated by my interest in trying to, reestablish the link between Central Bank independence and other macroeconomic variables, which had been largely studied, start, since the, the nineties. so by reviewing this literature, I, I noticed
00:00:34 - to understand the, the, the relationship between central bank independence and inflation, but also other macroeconomic variables. So this literature came to a almost clear conclusion on the fact that there existed, negative relationship between central bank independence and inflation, especially among, advanced economies. However, one of the, the main drawback of this literature, from my point of view, was related to the fact that,
00:01:03 - that I've seen published in this literature were actually considering, the degree of central bank independence as an endogenous variable in the sense that, all of the papers were taking Central Bank independence as given, while not, trying to understand which were the, political or economic drivers of reforming central bank, institutional design. So I started this paper by, with an ambitious aim of, proposing the first study on, the drivers
00:01:37 - for a large set of countries, which, and I ended up having a final sample of 154 countries over the period, 1972, up until, 2017. The dataset, here is a, a little disclaimer. I, I'm, I am, so the, the, the replication, data for, for the paper already available online, but I'm, I will sure, shortly release also the entire database in terms of legislation.
00:02:07 - that in order to create my database, the first exercise I had, I had to do was basically collect all the central bank legislations, right? And so when we think about data collection, is, is easy. For example, if we want to collect data from, GDP to go on IMF or the World Bank websites, download this data and implement our analysis. However, for Central Bank legislations, not even the Central Bank's websites,
00:02:36 - So if we think about a sample of around 150 countries, it'll be easy to, open the link to the Central Bank websites, go under, legislation section and download this document. Unfortunately, this was a, a more tedious exercise because, what, during the, the years of my PhD, I first had to collect, this Legislation by con contacting not only the central bank, but also other, governmental institutions.

Developing an Inclusive Central Bank Independence Index

00:03:09 - 2,500 documents. And, and, once the data collection or the, the legislation collection was implemented, I asked myself, how can I, create a measure of central bank independence, which is inclusive in the sense that it's able to capture not only the information that were the main characteristics of Central Bank as of the 1990s, when these first indexes of central bank independence were created,
00:03:39 - And so, my start, the starting point, for the creation of my index was first of all, try to identify the main characteristics which were present in the Greeley machine, Rini paper that was published in 1991, and the procure, webinar Apti paper published in 1992. And then also incorporate, so extend these indexes with more characteristics, and also incorporate some of the characteristics, of central bank design, which were not present in the nineties.
00:04:13 - by Central Bank financial independence, which became important, especially after the global financial crisis and, central bank accounting and, reporting and disclosure more in general. And so, once I've defined, just to give you a little of the story of how I, I did basically for every central bank and for every legislation, I did an extensive review of all the literature on Central Bank, accountability,
00:04:43 - I came up with a list of 160 questions. So I end a cheat sheet for every, legislation and for every legislation, I had a sense of questions and various options, which are categorical variables, which will allow me basically to, understand the different decrees of central bank independence of a country. And so, once I, collected all these information, I needed actually to convert these categorical variables into a real index, right?
00:05:16 - to trim down the set of questions to those that were possible to be quantified, rather than a yes or no or descriptive questions. And so I came up with a final list of 42, subcategories, which were divided into six broader, areas. So the six broader areas included, the classical areas, that were the four classical areas that were already discussed in previous indexes, which were,
00:05:45 - all the characteristics on central bank governance, monetary policy implementation, the central bank objective, and lending to the governments, which were present in both the Greeley machine, notit, Bini, and the procurement web, web and AAPT paper. And then what I also did, I added this new subsection or two dimension, on, central bank financial independence and accountability. And so once I had this, this data, I actually try

Reforms and Drivers of Central Bank Independence

00:06:20 - As I said before, every time a legislation changed, right? Not only a new legislation was enacted, but also an amendment was brought to the legislation, I basically recomputed my index, right? And so, being able to, to make this process automatic, I was actually able to look at, the variation in the index and identify the number of reforms. So this allowed me for the sample of 155 countries in my sample, to have
00:06:49 - which could ever be, identified in, in the literature. When, I had a total number of, 286 reforms implemented, over the period of my analysis, the data collection parts took a large, amount of, of my time during the PhD. But afterwards, what I tried to, I wanted to do was actually to try to understand, which were the drivers. So I, I use, the, the large literature in the political economy of reform.
00:07:22 - design, but also on other characteristics of a country to understand, which could be the, the elements that influence reforms, right? And so I started collecting, possible, drivers and possible, elements that my influence. And so, among the characteristics I, I, I started, that were present in this literature, there was the evidence that the status quo bias, so the level of, independence or the level of, development
00:07:52 - and the trade off implement of implementing our reform, right? So the first measure of status quo bias that is used in the paper is the lag level of, central bank independence. But other elements are important. So when it comes to national and international, institutions, we know that, some external pressure, comes at play, right? So there are already established paper in the literature that we're suggesting that, the,
00:08:23 - which can boost reforms. When we think about the extended Washington consensus, we know that typically, countries that re receive an IMF support are more, more likely to, to implement rebel liberalization reforms, right? And so, and a possible driver of, of reforming central bank design was, the effects on, creating sim. First of all, Adam Damion, whether the country,
00:08:53 - So this is the first measure of external inducement. another pressure that can come at play is the fact that, if we think a bit about, for example, Euro area countries, we know that in terms of four countries, in order to be able to join the Euro area, they need to follow certain convergence in the reform process. And so, being, a country which is eligible to enter a monetary union, we can have as a,

Drivers of Central Bank Independence Reforms

00:09:23 - And a final element of PR pressure is, is captured, by looking, for example, at the, the famous, paper by does democracy grow growth, on the peer pressures coming from, the, the lever, the, the distance between, the, the degree of independence of the central bank and, and the peers in their same regions, right? And so this is the, the third measures, but then there are other elements.
00:09:54 - and there is, especially the after the global financial crisis that, people were asking on whether, crisis, cause or reforms, right? So it's easier to implement austerity measure or tough reforms during period of crisis. So I also control for measures such as hyperinflation periods, financial crisis, currency and debt crisis. And then, in the last part of the,
00:10:26 - the political institutions. so for example, for using the policy index, but also some economic characteristics. For example, the level of, debt to GDP and an index of globalization. So, in, in my point, from my point of view, I, I started with this agnostic view in trying to, not put any prior on what I would expect. I, I added these variables as a potential control,
00:10:55 - to understand which could be the main drivers of reforms. The findings are, are pretty straightforward. They, they suggest that, the large number of robustness check that I have implemented, I find large evidence on the fact that both intern national and external, so internal and external factors are large driver of reforms. So there is an unconditional doubt on the fact that,
00:11:25 - to reforms are those countries that are characterized by a lower level of independence. So we see these trend in independence, and so not surprisingly, we find that countries that are less, independent are the, the one that are more likely to reform. But at the same time, we also find that, countries that are under an IMF program or are, soon to, to be joining a monetary union, are more likely to reform
00:12:00 - what we also find is that basically, countries that are characterized by a lower level of independence as compared to their peer, they are more likely to reform. So there is this idea of a peer effect or catch up effect that countries that are left behind in terms of independence, when it is the time to reform, they will be the one that are reforming their, their independence the most. And then there are also some, some other interesting facts

Reforms and Central Bank Independence Dynamics

00:12:27 - We don't find much of a results when we look at the entire, process, of reforms driven by, global financial crisis, or, banking, currency crisis or type crisis. Undoubtedly, we find that, I hyperinflation episodes are associated with period of reforms. So, this happened in a few set of countries, when it, we narrow wrote down the analysis to,
00:12:59 - but also in the direction of reforms. We find that typically negative reforms or, re reversal in central bank independence are more likely to happen during a, after a financial crisis as it happened, during the, the post, global financial crisis. And, probably, the, some, there are some other elements that, that we can find. For example, when we look at the results, for,
00:13:30 - government changes are, important in driving reforming central bank independence. If you think about the United Kingdom in 1997, after the, the appointment of a new government, while when it comes to, developing countries, we find that, the results are mainly driven by the peer pressure coming from IMF programs. The conclusion of implication and implication of our paper, are, pretty straightforward, on top of, showing that,
00:14:06 - of central bank independence of a country, it's also important to take into account, the, the, the endogeneity of these variables. So, the, the results and this dynamic index, which is publicly available online, should serve as a good instrument to, to capture the degree of central bank independence and more, Bo broadly. Our, this paper speaks to the, to the literature on the political economy of reforms, and basically shows that, political,
00:14:57 - and economic institutions such as, central banks or other, institutions are, are not, con, should not be always considered as a exogenous variable while implementing any type of analysis, but actually, their, their characteristics and their dynamics evolve endogenously, depending on the political and economic conditions of a country.

Faculti AI can make mistakes

Faculti

Popular in Political Science

Keeping the Republic

Entrepreneurial thinking: the politics and practice of policy impact

Parties and Elections: An End to Canadian Exceptionalism?

The Politics of Knowledge in Development

Fifty years of declining confidence and increasing polarization in trust

The Opening Dilemma

Wait and See?

The political economy of reforms in Central Bank design

Next in Political Economy

Guide

Platform and Category Pages

Contact Us

FAQs

What is Faculti?

How do you select interviews?

Interview Process

Page Structure

Popular in Political Science

Guide

Platform and Category Pages

Contact Us

FAQs

What is Faculti?

How do you select interviews?

Interview Process

Accessibility Options

Contrast Adjustment

Text Size Adjustment

Text Spacing Adjustment

Line Height Adjustment

Cursor Size Adjustment

Page Structure Options

Page Structure