D4 Published development or research report or study
Central bank independence and sovereign debt crisis. Any link?
Authors: Kari Heimonen, Aleksandra Maslowska-Jokinen
Publisher: Aboa centre for Economics
Publication year: 2014
Volume: 93
Web address : http://ace-economics.fi/kuvat/dp93.pdf
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 credibil-
ity as a borrower. It opens new possibilities to borrow money and to in-
crease 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 eco-
nomic 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.
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 credibil-
ity as a borrower. It opens new possibilities to borrow money and to in-
crease 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 eco-
nomic 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.
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