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Central Bank Independence and Budget Deficits in Developing Countries: New Evidence from Panel Data Analysis

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  • Yannick Lucotte

    (LEO - Laboratoire d'économie d'Orleans [2008-2011] - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique)

Abstract

Over the past two decades, many countries have passed legislation giving more independence to their central banks. This institutional evolution has concerned several developed countries but also developing countries and, is consistent with the Barro and Gordon's theory of time-inconsistent monetary policy, which emphasizes the importance of independence in terms of acquiring anti-inflationary credibility. But, central bank independence (CBI) could also affect the design of fiscal policy. Indeed, theoretical literature shows that a greater degree of independence influences government to fiscal discipline; conversely, a weak degree of independence may influence the government to pursue lax fiscal policy. However, the few empirical studies that attempted to assess the relation between CBI and budget deficits principally focused on industrial countries and provided disappointing econometric results. This paper seeks to address this gap in the literature by providing empirical analysis of the influence of CBI on budget deficits in a large set of developing countries over the 1995-2004 period. Using a panel data analysis and two indicators of CBI, the results show a negative relationship between CBI and budget deficits.

Suggested Citation

  • Yannick Lucotte, 2009. "Central Bank Independence and Budget Deficits in Developing Countries: New Evidence from Panel Data Analysis," Post-Print halshs-00447398, HAL.
  • Handle: RePEc:hal:journl:halshs-00447398
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00447398
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    Cited by:

    1. Lucotte, Yannick, 2012. "Adoption of inflation targeting and tax revenue performance in emerging market economies: An empirical investigation," Economic Systems, Elsevier, vol. 36(4), pages 609-628.
    2. Mr. Felix Fischer & Charlotte J. Lundgren & Mr. Samir Jahjah, 2013. "Making Monetary Policy More Effective: The Case of the Democratic Republic of the Congo," IMF Working Papers 2013/226, International Monetary Fund.
    3. Juan Camilo Galvis Ciro & Helder Ferreira de Mendonça, 2017. "Effect of credibility and reputation on discretionary fiscal policy: empirical evidence from Colombia," Empirical Economics, Springer, vol. 53(4), pages 1529-1552, December.
    4. Yannick Lucotte, 2010. "Adoption of inflation targeting and tax revenue performance in emerging market economies: An empirical investigation," Post-Print halshs-00505140, HAL.
    5. Abel Mawuko Agoba & Joshua Yindenaba Abor & Kofi Achampong Osei & Jarjisu Sa-Aadu, 2020. "The Independence of Central Banks, Political Institutional Quality and Financial Sector Development in Africa," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 19(2), pages 154-188, August.
    6. Tadadjeu Wemba, Dessy-Karl & Essiane, Patrick-Nelson Daniel, 2018. "Autonomie des Banques Centrales et Finances Publiques en Afrique subsaharienne [Autonomy of Central Banks and Public Finances in Sub-saharan Africa]," MPRA Paper 100828, University Library of Munich, Germany.
    7. Lucotte, Yannick, 2010. "Adoption of inflation targeting and tax revenue performance in emerging market economies: An empirical investigation," MPRA Paper 23871, University Library of Munich, Germany.
    8. Strong, Christine & Yayi, Constant, 2021. "Central bank independence, fiscal deficits and currency union: Lessons from Africa," Journal of Macroeconomics, Elsevier, vol. 68(C).
    9. Nawaz, Muhammad & Iqbal, Muhammad Mazhar & Ali, Amanat & Zaman, Khalid, 2012. "Fiscal Theory of Price Level: A Panel Data Analysis for selected Saarc Countries," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 152-170, September.

    More about this item

    Keywords

    Central bank independence; Budget balances; Developing countries; Panel data analysis;
    All these keywords.

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