Central Bank Independence and Fiscal Policy: Can the Central Bank Restrain Deficit Spending?

Cristina Bodea, Masaaki Higashijima

Research output: Contribution to journalArticlepeer-review

33 Citations (Scopus)


Independent central banks prefer balanced budgets due to the long-run connection between deficits and inflation, and can enforce their preference through interest rate increases and denial of credit to the government. This article argues that legal central bank independence (CBI) deters fiscal deficits predominantly in countries with rule of law and impartial contract enforcement, a free press and constraints on executive power. It further suggests that CBI may not affect fiscal deficits in a counter-cyclical fashion, but instead depending on the electoral calendar and government partisanship. The article also tests the novel hypotheses using new yearly data on legal CBI for seventy-eight countries from 1970 to 2007. The results show that CBI restrains deficits only in democracies, during non-election years and under left government tenures.

Original languageEnglish
Pages (from-to)47-70
Number of pages24
JournalBritish Journal of Political Science
Issue number1
Publication statusPublished - 2017 Jan 1
Externally publishedYes

ASJC Scopus subject areas

  • Political Science and International Relations


Dive into the research topics of 'Central Bank Independence and Fiscal Policy: Can the Central Bank Restrain Deficit Spending?'. Together they form a unique fingerprint.

Cite this