ASSESSING CENTRAL BANK INDEPENDENCE IN DEVELOPING-COUNTRIES - DO ACTIONS SPEAK LOUDER THAN WORDS

My fiscal dominance hypothesis of central bank independence posits tha t the size of the government's deficit and the methods by which it is financed determine central bank independence in developing countries. I measure central bank independence by the extent to which a central b ank neutralises the effects of increased credit demands by the governm ent on the money supply by reducing credit to the private sector. My e stimates show that larger deficits and greater government reliance on the domestic banking system are associated with less central bank neut ralisation of increased government borrowing from the banking system.