Publication: Central Bank Independence and Sovereign Borrowing
Loading...
Published
2025-07-25
ISSN
Date
2025-07-25
Editor(s)
Abstract
This paper studies the impact of central bank independence on sovereign borrowing, using an index that captures institutional constraints on central bank lending to the government across 155 countries from 1972 to 2023. The findings show that tighter lending to the executive significantly reduces sovereign interest rates and raises the debt-to-gross domestic product ratio in developing countries. These effects reflect the executive’s improved ability to borrow at lower costs under greater central bank independence. The results are robust to multiple tests, but there are no significant effects in advanced economies. From a policy perspective, the results highlight the key role of independent central banks as catalysts for reducing governments’ borrowing costs and enhancing the government’s borrowing capacity.
Link to Data Set
Citation
“Athanasopoulos, Angelos; Fraccaroli, Nicolò; Kern, Andreas; Romelli, Davide. 2025. Central Bank Independence and Sovereign Borrowing. Policy Research Working Paper; 11179. © World Bank. http://hdl.handle.net/10986/43506 License: CC BY 3.0 IGO.”
Digital Object Identifier
Associated URLs
Associated content
Other publications in this report series
Publication Climate and Social Sustainability in Fragility, Conflict, and Violence Contexts(Washington, DC: World Bank, 2026-01-07)Climate change is widely recognized as a driver of violent conflict, but its broader social effects remain less understood. Ignoring these dimensions risks a vicious cycle where climate policies might undermine socially just adaptation. Evidence is still limited on how climate shocks influence political participation, trust, or migration. This paper helps fill that gap by examining links between climate change, conflict, and social sustainability, with a focus on inclusion, resilience, cohesion, and legitimacy. Using secondary data from 2019–24, the study applies simple correlation-based methods to test three hypotheses on the nature, severity, and composition of these associations. The analysis combines multiple climate impact measures, new conflict classifications, recent social sustainability frameworks, and controls for population and geography. The results reveal strong correlations—not causation—between climate events and contexts of fragility, conflict, and violence. Climate impacts are most pronounced in both national and subnational conflict settings. The study also finds robust links between fragility, conflict, and violence and low levels of social sustainability, reflecting its role as both a driver and consequence of conflict. Some dimensions—such as violent events and insecurity—appear weaker in areas most affected by climate shocks. Two of the hypotheses are supported, and one remains inconclusive.Publication The Macroeconomic Implications of Climate Change Impacts and Adaptation Options(Washington, DC: World Bank, 2025-05-29)Estimating the macroeconomic implications of climate change impacts and adaptation options is a topic of intense research. This paper presents a framework in the World Bank's macrostructural model to assess climate-related damages. This approach has been used in many Country Climate and Development Reports, a World Bank diagnostic that identifies priorities to ensure continued development in spite of climate change and climate policy objectives. The methodology captures a set of impact channels through which climate change affects the economy by (1) connecting a set of biophysical models to the macroeconomic model and (2) exploring a set of development and climate scenarios. The paper summarizes the results for five countries, highlighting the sources and magnitudes of their vulnerability --- with estimated gross domestic product losses in 2050 exceeding 10 percent of gross domestic product in some countries and scenarios, although only a small set of impact channels is included. The paper also presents estimates of the macroeconomic gains from sector-level adaptation interventions, considering their upfront costs and avoided climate impacts and finding significant net gross domestic product gains from adaptation opportunities identified in the Country Climate and Development Reports. Finally, the paper discusses the limits of current modeling approaches, and their complementarity with empirical approaches based on historical data series. The integrated modeling approach proposed in this paper can inform policymakers as they make proactive decisions on climate change adaptation and resilience.Publication Institutional Capacity for Policy Implementation: An Analytical Framework(Washington, DC: World Bank, 2026-01-07)State capacity is an important prerequisite for policy implementation, yet at the country level it is difficult to measure, assess, and reform. This paper proposes a focus on institutional capacity: the ability of public institutions to implement the specific policy mandates for which they are responsible. Based on a review of existing literature, the paper defines the different dimensions that compose institutional capacity and groups them into two cross-cutting categories: organizational dimensions (personnel, financial resources, information systems, and management practices) and governance dimensions (transparency, independence, and accountability). The paper proposes measures for organizational and governance dimensions using existing data, shows intra-institutional variation of these measures within countries, and discusses how new data could be collected for better measurement of these concepts. Finally, the paper illustrates how the framework can be used to diagnose the sources of common problems related to weak policy implementation.Publication South Africa’s Fragmented Cities: The Unequal Burden of Labor Market Frictions(Washington, DC: World Bank, 2026-01-08)Using high-resolution administrative, census, and satellite data, this paper shows that South African cities are characterized by spatial mismatches between where people live and where jobs are located, relative to 20 global peers. Areas within 5 kilometers of commercial centers have 9,300 fewer residents per square kilometer than expected, which is 60 percent below the global median. Poor, dense neighborhoods are most affected. In Johannesburg, a 10-percentile increase in distance from the nearest business hub corresponds to a 3.7-percentile drop in asset wealth (a proxy of household wellbeing) and 4.9-percentile drop in employment. In Cape Town, the declines are 4.0 and 3.7 percentiles, respectively. Employment is 87 percent lower in the poorest decile than the richest in Johannesburg and 61 percent lower in Cape Town. These findings suggest that South Africa’s spatial organization of people and economic activity constrains agglomeration and reinforces inequality. This methodology provides a scalable and standardized data-driven framework to analyze spatial accessibility and agglomeration frictions in complex, data-constrained urban systems.Publication Investment in Emerging and Developing Economies(Washington, DC: World Bank, 2026-01-07)The world faces a pressing challenge to meet key development objectives amid slowing growth and rising macroeconomic and geopolitical risks. With the number of job seekers rising rapidly, infrastructure shortfalls continuing to be large, and climate costs mounting, the case for a significant investment push has never been stronger. Yet the capacity to respond in many emerging markets and developing economies has eroded. Since the global financial crisis, investment growth has slowed to about half its pace in the 2000s, with both public and private investment weakening. Foreign direct investment inflows—a critical source of capital, technology, and managerial know-how—have also fallen sharply and become increasingly concentrated, leaving low-income countries with only a marginal share. The risks of further retrenchment are significant, as trade tensions, policy uncertainty, and elevated debt levels continue to weigh on investment. Reigniting momentum will require ambitious domestic reforms to strengthen institutions, rebuild macro-fiscal stability, and deepen trade and investment integration—the foundations of a supportive business climate. At the same time, international cooperation is indispensable. A renewed commitment to a predictable system of cross-border trade and investment flows, combined with scaled-up financial support and sustained technical assistance, is essential to help emerging markets and developing economies—especially low-income countries and economies in fragile and conflict situations—bridge financing gaps and implement the domestic reforms needed to restore investment as an engine of growth, jobs, and development.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Sovereign Debt Management in Crisis in Europe and Central Asia(Washington, DC, 2013-05)The global financial crisis of 2008-2009 required most sovereign debt managers to adapt to rapidly changing market circumstances, by changing the mix of borrowing instruments and adopting techniques that minimize the impact of severe market dislocations and increased risk aversion. These actions, allied to prudent macroeconomic and debt management policies implemented by government in the years preceding the crises, were critical in helping countries meet their financing needs without undue strain on the financial markets. This toolkit draws on the approaches taken by a range of countries and provides sovereign debt policy makers with a rich set of potential actions to address crisis periods. A practical illustration on the use of some of these actions is conducted by analyzing the measures taken by Romania, Serbia and Turkey as a response to the recent crises. Authors draw lessons from these experiences and examine what other measures included in the toolkit could have been used to boost the crisis response impact in these economies, respecting country-specific contexts.Publication Bureaucratic Delegation and Political Institutions : When Are Independent Central Banks Irrelevent?(World Bank, Washington, DC, 2000-06)The government's ability to credibly commit to policy announcements is critical to the successful implementation of economic policies as diverse as capital taxation and utilities regulation. One frequently advocated means of signaling credible commitment is to delegate authority to an agency that will not have an incentive to opportunistically change policies once the private sector has taken such steps as signing wage contracts or making irreversible investments. Delegating authority is suggested as a government strategy particularly for monetary policy. And existing work on the independence of central banks generally assumes that government decisions to delegate are irrevocable . But delegation - in monetary policy as elsewhere-is inevitably a political choice, and can be reversed, contend the authors. They develop a model of monetary policy that relaxes the assumption that monetary delegation is irreversible. Among the testable predictions of the model are these: A) The presence of an independent central bank should reduce inflation only in the presence of political checks and balances. This effect should be evident in both developing and industrial countries. B) Political actions to interfere with the central bank should be more apparent when there are few checks and balances. C) The effects of checks and balances should be more marked when political decisionmakers are more polarized. The authors test these predictions and find extensive empirical evidence to support each of the observable implications of their model: Central banks are associated with better inflation outcomes in the presence of checks and balances. The turnover of central bank governors is reduced when governors have tenure protection supported by political checks and balances. And the effect of checks and balances is enhanced in more polarized political environments.Publication International Reserves and Central Bank Independence(World Bank, Washington, DC, 2021-11)This paper proposes a novel theory of reserve accumulation that emphasizes the role of an independent central bank. Motivated by a positive correlation between reserve accumulation and central bank independence in Latin America, the paper develops a quantitative sovereign default model with an independent central bank that can accumulate a risk-free foreign asset. The findings show that if the central bank is more patient than the government and as patient as households are, in equilibrium, the government issues more debt than what is socially optimal, and the central bank accumulates reserves to undo government over-borrowing. A key insight is that the government can issue more debt for any level of reserves but chooses not to because doing so would increase sovereign spreads, making it more costly to borrow. Quantitatively, the analysis finds that the central bank independence channel accounts for 75 percent of the average reserve levels observed in Mexico from 1994 to 2017. Finally, the paper shows that accumulating reserves improves social welfare. Welfare gains come from reducing the costs of front-loading public spending.Publication Banking and Regulation in Emerging Markets : The Role of External Discipline(Oxford University Press on behalf of the World Bank, 2006-08-05)This article reviews the main issues of regulating and supervising banks in emerging markets with a view toward evaluating the long-run options. Particular attention is paid to Latin America and East Asia. These economies face a severe policy commitment problem that leads to excessive bailouts and potential devaluation of claims of foreign investors. This exacerbates moral hazard and makes a case for importing external discipline (for example, acquiring foreign short-term debt). However, external discipline may come at the cost of excessive liquidation of entrepreneurial projects. The article reviews the tradeoffs imposed by external discipline and examines various arrangements, such as narrow banking, foreign banks and foreign regulation, and the potential role for an international agency or international lender of last resort.Publication European Economic and Monetary Union Sovereign Debt Markets(World Bank Group, Washington, DC, 2015-01)This paper focuses on developments in the European Economic and Monetary Union sovereign debt markets in the past decade. The first part analyzes the integration and segmentation structure of the bond markets of the Economic and Monetary Union before and after the sovereign debt crisis, by introducing the novel concept of correlation-based stable networks. Accordingly, a fair integration is observed between the bond markets during the pre-crisis period. However, a strict segmentation emerges, separating the members struggling with debt problems and the ones with relatively strong fiscal performances during the sovereign debt turmoil. The segmentation structure is clearly visualized, revealing the potential paths for crisis and recovery transmission in the future. In the second part, the paper comments on the recent decreasing trend in Economic and Monetary Union member bond yields and their increasing degree of co-movement. Accordingly, the paper argues that these changes do not depend on the fiscal performances of the member countries, but depend on the illusion of quality that appeared with the Fed (U.S. Federal Reserve) tapering signals in early 2013.
Users also downloaded
Showing related downloaded files
Publication The Container Port Performance Index 2023(Washington, DC: World Bank, 2024-07-18)The Container Port Performance Index (CPPI) measures the time container ships spend in port, making it an important point of reference for stakeholders in the global economy. These stakeholders include port authorities and operators, national governments, supranational organizations, development agencies, and other public and private players in trade and logistics. The index highlights where vessel time in container ports could be improved. Streamlining these processes would benefit all parties involved, including shipping lines, national governments, and consumers. This fourth edition of the CPPI relies on data from 405 container ports with at least 24 container ship port calls in the calendar year 2023. As in earlier editions of the CPPI, the ranking employs two different methodological approaches: an administrative (technical) approach and a statistical approach (using matrix factorization). Combining these two approaches ensures that the overall ranking of container ports reflects actual port performance as closely as possible while also being statistically robust. The CPPI methodology assesses the sequential steps of a container ship port call. ‘Total port hours’ refers to the total time elapsed from the moment a ship arrives at the port until the vessel leaves the berth after completing its cargo operations. The CPPI uses time as an indicator because time is very important to shipping lines, ports, and the entire logistics chain. However, time, as captured by the CPPI, is not the only way to measure port efficiency, so it does not tell the entire story of a port’s performance. Factors that can influence the time vessels spend in ports can be location-specific and under the port’s control (endogenous) or external and beyond the control of the port (exogenous). The CPPI measures time spent in container ports, strictly based on quantitative data only, which do not reveal the underlying factors or root causes of extended port times. A detailed port-specific diagnostic would be required to assess the contribution of underlying factors to the time a vessel spends in port. A very low ranking or a significant change in ranking may warrant special attention, for which the World Bank generally recommends a detailed diagnostic.Publication Business Ready 2024(Washington, DC: World Bank, 2024-10-03)Business Ready (B-READY) is a new World Bank Group corporate flagship report that evaluates the business and investment climate worldwide. It replaces and improves upon the Doing Business project. B-READY provides a comprehensive data set and description of the factors that strengthen the private sector, not only by advancing the interests of individual firms but also by elevating the interests of workers, consumers, potential new enterprises, and the natural environment. This 2024 report introduces a new analytical framework that benchmarks economies based on three pillars: Regulatory Framework, Public Services, and Operational Efficiency. The analysis centers on 10 topics essential for private sector development that correspond to various stages of the life cycle of a firm. The report also offers insights into three cross-cutting themes that are relevant for modern economies: digital adoption, environmental sustainability, and gender. B-READY draws on a robust data collection process that includes specially tailored expert questionnaires and firm-level surveys. The 2024 report, which covers 50 economies, serves as the first in a series that will expand in geographical coverage and refine its methodology over time, supporting reform advocacy, policy guidance, and further analysis and research.Publication Global Economic Prospects, June 2025(Washington, DC: World Bank, 2025-06-10)The global economy is facing another substantial headwind, emanating largely from an increase in trade tensions and heightened global policy uncertainty. For emerging market and developing economies (EMDEs), the ability to boost job creation and reduce extreme poverty has declined. Key downside risks include a further escalation of trade barriers and continued policy uncertainty. These challenges are exacerbated by subdued foreign direct investment into EMDEs. Global cooperation is needed to restore a more stable international trade environment and scale up support for vulnerable countries grappling with conflict, debt burdens, and climate change. Domestic policy action is also critical to contain inflation risks and strengthen fiscal resilience. To accelerate job creation and long-term growth, structural reforms must focus on raising institutional quality, attracting private investment, and strengthening human capital and labor markets. Countries in fragile and conflict situations face daunting development challenges that will require tailored domestic policy reforms and well-coordinated multilateral support.Publication Global Economic Prospects, January 2025(Washington, DC: World Bank, 2025-01-16)Global growth is expected to hold steady at 2.7 percent in 2025-26. However, the global economy appears to be settling at a low growth rate that will be insufficient to foster sustained economic development—with the possibility of further headwinds from heightened policy uncertainty and adverse trade policy shifts, geopolitical tensions, persistent inflation, and climate-related natural disasters. Against this backdrop, emerging market and developing economies are set to enter the second quarter of the twenty-first century with per capita incomes on a trajectory that implies substantially slower catch-up toward advanced-economy living standards than they previously experienced. Without course corrections, most low-income countries are unlikely to graduate to middle-income status by the middle of the century. Policy action at both global and national levels is needed to foster a more favorable external environment, enhance macroeconomic stability, reduce structural constraints, address the effects of climate change, and thus accelerate long-term growth and development.Publication The Container Port Performance Index 2020 to 2024: Trends and Lessons Learned(Washington, DC: World Bank, 2025-09-22)The Container Port Performance Index (CPPI) provides a global benchmark of how container ports perform in handling vessel calls. Developed jointly by the World Bank and S&P Global Market Intelligence, it measures the time ships spend in port and relates this to the number of containers moved during that time. This approach makes the CPPI a unique diagnostic tool that can highlight patterns in port operations and shed light on global and regional supply chain dynamics. Now in its fifth edition, the CPPI report covers the period from 2020 to 2024. It builds on a well-established methodology to generate scores for more than 400 container ports worldwide. Over time, the CPPI has become a trusted reference point for policymakers, industry stakeholders, and researchers who seek to understand how ports adapt to shocks, recover from disruptions, and identify opportunities for investments, reform and modernization. A major innovation in this edition is the introduction of multi-year trend analysis. Rather than presenting annual snapshots, the report now tracks how CPPI scores have changed across five years. This longitudinal perspective reveals shifts in port performance, showing where scores have risen, fallen, or remained stable. By linking these movements to external factors, the CPPI offers insights into how global and regional supply chains evolve under pressure. The results clearly mirror the crises that have shaken global trade. During the COVID-19 pandemic, CPPI scores in different regions declined sharply as congestion, equipment shortages, and delays overwhelmed many ports. By 2023, global averages rebounded in parallel with easing freight markets and reduced congestion. Yet 2024 brought new challenges: the Red Sea crisis disrupted major trade lanes, while climate-related constraints at the Panama Canal added further stress. These shocks were reflected in lower global and several regional average scores, underscoring the vulnerability of maritime transport to geopolitical and environmental events. The CPPI is not about comparing one port against another, but about understanding changes in performance over time. Ports that improved their scores often did so by reducing time at anchor, optimizing berth operations, investing in digital tools, and strengthening coordination across logistics partners. The evidence confirms that improvements are possible across ports of all sizes, and that rising scores are linked to deliberate actions to minimize time in port relative to containers moved. By consolidating five years of results, this edition transforms the CPPI into a long-term reference point. It shows how global crises have affected shipping, how different regions have adapted, and what lessons can be drawn for future resilience. The World Bank and S&P Global Market Intelligence remain committed to maintaining the CPPI as a global public good, providing transparency, comparability, and practical insights to support more reliable and sustainable maritime supply chains.