The political economy of IMF conditionality and central bank independence

Reinsberg, B. , Kern, A. and Rau-Göhring, M. (2021) The political economy of IMF conditionality and central bank independence. European Journal of Political Economy, 68, 101987. (doi: 10.1016/j.ejpoleco.2020.101987)

Abstract

International organizations (IOs) often drive policy change in member countries. Given IOs' limited political leverage over a member country, previous research argues that IOs rely on a combination of hard pressures (i.e., conditionality) and soft pressures (i.e., socialization) to attain their political goals. Expanding this literature, we hypothesize that IOs can enhance their political leverage through loan conditions aimed at enhancing the political independence of key administrative units. Studying this mechanism in the context of the International Monetary Fund (IMF), we argue that through prescribing structural loan conditions on central banks (CBI conditionality), the IMF empowers central banks to gain more political leverage with the aim to limit a government's ability to (ab)use monetary policy for political gain. Divorcing monetary authorities from their respective government, the IMF intends to alter political dynamics towards achieving greater program compliance and enhance long-term macro-financial stability. Relying on a dataset including up to 124 countries between 1980 and 2012, we find that the IMF deploys CBI conditionality to countries with fewer checks and balances, a less independent central bank, and where the government relies more heavily on the monetization of public debt.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Reinsberg, Dr Bernhard
• Authors: Reinsberg, B., Kern, A., and Rau-Göhring, M.
• College/School: College of Social Sciences > School of Social and Political Sciences > Politics
• Journal Name: European Journal of Political Economy
• Publisher: Elsevier
• ISSN: 0176-2680
• ISSN (Online): 1873-5703
• Published Online: 13 December 2020
• Copyright Holders: Copyright © 2020 Elsevier B.V.
• First Published: First published in European Journal of Political Economy 68: 101987
• Publisher Policy: Reproduced in accordance with the publisher copyright policy