FINANCIAL INCENTIVES AND CENTRAL BANK AUTHORITY IN INDUSTRIALIZING NATIONS

Institutionalist models of macroeconomic performance in advanced indus trial countries focus on central bank independence. In newly industria lizing countries, however, the behavioral authority of the central ban k is a much more significant predictor of inflation than is legal inde pendence, because laws there are not the source of central bank abilit y to create or defend macroeconomic stability. Financial structures an d the incentives they create for government politicians, private banke rs, and industrialists explain cross-national variation in the interes t and capacity of central banks in developing countries. The greater p ublic sector deficits are, the weaker and/or more dependent private ba nks are on state assistance; and the larger the portion of industry fi nance covered by commercial bank loans or state credits, the less like ly it is that there will be an authoritative, conservative central ban k. Mexico, Thailand, Brazil, and South Korea are the four country case s considered in depth.