Central Bank Independence and the Fate of Authoritarian Regimes

A large number of authoritarian regimes have reformed their central banks, increasing legal independence. Yet, it is unclear whether economic institutions – like independent central banks – can be effective in such regimes. We argue that when central bank independence overlaps with the collective decision-making in dominant-party regimes – one particular type of authoritarian ruling regime – dictators have diminished control over the central bank. Thus the central bank becomes effective enough to restrict expansionary fiscal policy, reducing the mobilization of supporters through patronage and increasing authoritarian breakdown risk. Analyses detailed in Bodea et al. (2019)4 using data from 1970 to 2012 in 94 authoritarian regimes find that high central bank independence in dominant-party regimes increases the likelihood of authoritarian breakdown. Moreover, independent central banks in dominant-party regimes contribute to lower fiscal expenditures. Our work shows that promoting central bank reforms in authoritarian regimes may lead to the expected economic effects, but the political effect of such institutions can be unexpected.