Central Bank Independence and Sovereign Borrowing

We study how reforms that tighten statutory limits on central‐bank lending to government affect sovereign borrowing in 155 countries over 1972‐2023. Using instrumental‐variable local projections, we estimate their effects on public debt and real effective implicit interest rates. We find that in developing economies tighter constraints raise debt‐to‐GDP while reducing real borrowing costs. A median‐sized reform temporarily increases debt‐to‐GDP by about 12 percentage points at its two‐year peak, and lowers the real effective implicit interest rate by roughly 6 percentage points after five years, an effect that persists over the ten‐year horizon. Foreign‐held external public debt also rises persistently. Advanced economies show a smaller debt response of the opposite sign and no decline in borrowing costs. The real‐rate decline persists under alternative debt denominators and relative to the United States. State‐dependent estimates show that lower borrowing costs are strongest in high‐inflation developing economies, consistent with statutory lending constraints improving sovereign borrowing conditions where credibility gains are greatest.