Cristina Bodea

Price Stability and Central Bank Independence: Discipline, Credibility, and Democratic Institutions

Despite mixed empirical evidence, in the past two decades central bank independence (CBI) has been on the rise under the assumption that it ensures price stability. Using an encompassing theoretical approach and new yearly data for de jure CBI (seventy-eight countries, 1973–2008), we reexamine this relationship, distinguishing the role of printing less money (discipline) from the publics beliefs about the central banks likely actions (credibility). Democracies differ from dictatorships in the likelihood of political interference and changes to the law because of the presence of political opposition and the freedom to expose government actions. CBI in democracies should be directly reflected in lower money supply growth. Besides being more disciplinarian, it also ensures a more robust money demand by reducing inflation expectations and, therefore, inflation. Empirical results are robust and support a discipline effect conditioned by political institutions, as well as a credibility effect.

Riots, Coups and Civil War: Revisiting the Greed and Grievance Debate

The most influential recent work on the determinants of civil wars found the factors associated with the grievance motivation to be largely irrelevant. Our paper subjects the results of this empirical work to further scrutiny by embedding the study of civil war in a more general analysis of varieties of violent contestation of political power within the borders of the state. Such an approach, we argue, will have important implications for how we think theoretically about the occurrence of domestic war as well as how we specify our empirical tests. In the empirical model, the manifestation of domestic conflict range from low intensity violence and coups to civil war. Our multinomial specification of domestic conflict supports the hypothesis that diversity accentuates distributional conflict and thus increases the risk of civil war. We also find that democracies may be more efficient than autocracies in reducing the risk of civil war.

Exchange Rate Regimes and Independent Central Banks: A Correlated Choice of Imperfectly Credible Institutions

Theory and empirical evidence show that low inflation is a precondition for economic growth. Independent central banks and fixed exchange rates are institutional mechanisms that help keep in ation low by lending monetary policy credibility to governments. However, the two institutions are commonly analyzed as substitutes that tie the hands of inflation prone governments. Thus, the literature has difficulties describing why governments would adopt both institutions and the interaction between them. This paper presents a model that allows policy makers the simultaneous choice of monetary institutions and shows that imperfectly credible institutions will overlap: When exchange rates are fixed but adjustable and central bank independence is not fully ascertainable, governments choose both institutions. More generally, the paper generates hypotheses about the conditions that make fixed exchange rates and independent central banks complements or substitutes, thus contributing to an explanation of the diversity of global monetary institutions in the post Bretton Woods period.

The Origins of Voluntary Compliance: Attitudes toward Taxation in Urban Nigeria

Voluntary compliance is an important aspect of strong tax regimes, but there is limited understanding of how social norms favoring compliance emerge. Using novel data from urban Nigeria, where tax enforcement is weak, this article shows that individuals with a positive experience of state services delivery are more likely to express belief in an unconditioned citizen obligation to pay tax. In addition to support for this fiscal exchange mechanism, social context is consequential. Where individuals have access to community-provided goods, which may substitute for effective state services provision, they are less likely to adopt pro-compliance norms. Finally, the article shows that norm adoption increases tax payment. These findings have broad implications for literatures on state formation, taxation and public goods provision.

Political violence and economic growth

This paper analyzes the economic growth impact of organized political violence. First, the authors articulate the theoretical underpinnings of the growth impact of political violence in a popular model of growth under uncertainty. The authors show that, under plausible assumptions regarding attitudes toward risk, the overall effects of organized political violence are likely to be much higher than its direct capital destruction impact. Second, using a quantitative model of violence that distinguishes between three levels of political violence (riots, coups, and civil war), the authors use predicted probabilities of aggregate violence and its three manifestations to identify their growth effects in an encompassing growth model. Panel regressions suggest that organized political violence, especially civil war, significantly lowers long-term economic growth. Moreover, unlike most previous studies, the authors also find ethnic fractionalization to have a negative and direct effect on growth, though its effect is substantially ameliorated by the institutions specific to a non-factional partial democracy. Third, the results show that Sub-Saharan Africa has been disproportionately impacted by civil war, which explains a substantial share of its economic decline, including the widening income gap relative to East Asia. Civil wars have also been costly for Sub-Saharan Africa. For the case of Sudan, a typical large African country experiencing a long-duration conflict, the cost of war amounts to

International Finance and Central Bank Independence: Institutional Diffusion and the Flow and Cost of Capital

46 billion (in 2000 fixed prices), which is roughly double the countrys current stock of external debt. Fourth, the authors suggest that to break free from its conflict-underdevelopment trap, Africa needs to better manage its ethnic diversity. The way to do this would be to develop inclusive, non-factional democracy. A democratic but factional polity would not work, and would be only marginally better than an authoritarian regime.

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

Research on central bank independence (CBI) focuses overwhelmingly on domestic causes and consequences. We consider CBI in relation to global finance. A first step links decisions to reform central bank legislation to a perceived need to attract capital in the form of foreign direct investment or sovereign borrowing. A second step models investors’ actual decisions as a function of CBI. We test our argument on a sample of 78 countries (1974–2007). Logit models investigate the determinants of central bank reform. Results show the effect of international capital through a direct-competition channel and through learning in the context of competition. Socialization of countries in networks of intergovernmental organizations is also a determinant of CBI reform. In addition, we show that CBI affects the flow and cost of capital in non-OECD countries, before CBI became globally widespread, and where political institutions allow the central bank to de facto be credible.

Ethnic inequality and coups in sub-Saharan Africa

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.

Do Civil Wars, Coups and Riots Have the Same Structural Determinants?

Does ethnic inequality breed coups? The recent literature on civil war shows both that inequality between ethnic groups induces war and, importantly, that civil wars and coups, although fundamentally different, are related. The literature on coups d’état, however, has yet to theorize and test the effect of ethnic inequality on coups. The link is plausible because many coups are ‘ethnic coups’, which depend on the capacity of plotters to mobilize their co-ethnics. We argue that large income and wealth disparities between ethnic groups accompanied by within-group homogeneity increase the salience of ethnicity and solidify within-group preferences vis-à-vis the preferences of other ethnic groups, increasing the appeal and feasibility of a coup. We use group-level data for 32 sub-Saharan African countries and 141 ethnic groups between 1960 and 2005 and provide the first large-N test to date of the effect of ethnic inequality on coups. Between- and within-group inequality measures are constructed based on survey data from the Afrobarometer and the Demographic and Health Surveys. We find strong support for our hypothesis: between-ethnic-group inequality (BGI) increases the likelihood that an ethnic group stages a coup only when within-ethnic-group inequality (WGI) is low. Coups remain frequent in sub-Saharan Africa and coups are the main threat to democracy in the region, by harming democratic consolidation and economic development, and by provoking further political instability. Our work provides a novel rationale to be concerned about ethnic inequality, showing that when ethnic and income cleavages overlap, destabilizing coups d’état are more likely.

Monetary Constraints, Spending, and Autocratic Survival in Party-Based Regimes

ABSTRACT The literature on political instability focuses on institutional and leader survival or outcomes like civil wars and coups. We suggest that this approach overlooks lower levels of instability and that isolating outcomes understates the likelihood that they are manifestations of similar structural determinants. We extend the notion of instability to encompass jointly but distinctly civil wars, coups, and riots. Our explanation focuses on the role of political institutions and the related ethnopolitical strife over state power. Using data from 1950 to 2007, we find that the three outcomes share some determinants such as a factional partial democracy and the exclusion from power of a large proportion of the population; the inverted U-shaped effect of political institutions is driven by a subset of semidemocracies; and there is a substitution relationship between civil wars and coups emerging from the composition of governing coalitions.