Publication: Central Bank Independence and Sovereign Borrowing
Loading...
Date
2025-07-25
ISSN
Published
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.”
Associated URLs
Associated content
Other publications in this report series
Publication Intergenerational Income Mobility around the World(Washington, DC: World Bank, 2025-07-09)This paper introduces a new global database with estimates of intergenerational income mobility for 87 countries, covering 84 percent of the world’s population. This marks a notable expansion of the cross-country evidence base on income mobility, particularly among low- and middle-income countries. The estimates indicate that the negative association between income mobility and inequality (known as the Great Gatsby Curve) continues to hold across this wider range of countries. The database also reveals a positive association between income mobility and national income per capita, suggesting that countries achieve higher levels of intergenerational mobility as they grow richer.Publication The Future of Poverty(Washington, DC: World Bank, 2025-07-15)Climate change is increasingly acknowledged as a critical issue with far-reaching socioeconomic implications that extend well beyond environmental concerns. Among the most pressing challenges is its impact on global poverty. This paper projects the potential impacts of unmitigated climate change on global poverty rates between 2023 and 2050. Building on a study that provided a detailed analysis of how temperature changes affect economic productivity, this paper integrates those findings with binned data from 217 countries, sourced from the World Bank’s Poverty and Inequality Platform. By simulating poverty rates and the number of poor under two climate change scenarios, the paper uncovers some alarming trends. One of the primary findings is that the number of people living in extreme poverty worldwide could be nearly doubled due to climate change. In all scenarios, Sub-Saharan Africa is projected to bear the brunt, contributing the largest number of poor people, with estimates ranging between 40.5 million and 73.5 million by 2050. Another significant finding is the disproportionate impact of inequality on poverty. Even small increases in inequality can lead to substantial rises in poverty levels. For instance, if every country’s Gini coefficient increases by just 1 percent between 2022 and 2050, an additional 8.8 million people could be pushed below the international poverty line by 2050. In a more extreme scenario, where every country’s Gini coefficient increases by 10 percent between 2022 and 2050, the number of people falling into poverty could rise by an additional 148.8 million relative to the baseline scenario. These findings underscore the urgent need for comprehensive climate policies that not only mitigate environmental impacts but also address socioeconomic vulnerabilities.Publication Engineering Ukraine’s Wirtschaftswunder(Washington, DC: World Bank, 2025-07-29)As Ukraine emerges from the devastation of war, it faces a historic opportunity to engineer its own Wirtschaftswunder—a productivity-driven economic transformation akin to post-war West Germany. While investment-led growth may offer quick wins, it is efficiency, innovation, and institutional reform that will determine Ukraine’s long-term economic trajectory. Drawing on rich micro-level firm data spanning 25 years, this paper uncovers deep structural distortions that have suppressed creative destruction and productivity in Ukraine. It finds that business dynamism is on the decline, alongside rising market concentration among incumbent businesses, including low productivity state owned enterprises. To inform priorities for reviving business dynamism, this study develops a model of creative destruction drawing on Acemoglu et al. (2018) and Akcigit et al. (2021). The quantitative assessment highlights that policies that discipline entrenched incumbents are the bedrock for reviving business dynamism and engineer Ukraine’s Wirtschaftswunder. Policies targeting specific types of firms have limited efficacy when incumbents run wild.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 Disentangling the Key Economic Channels through Which Infrastructure Affects Jobs(Washington, DC: World Bank, 2025-04-03)This paper takes stock of the literature on infrastructure and jobs published since the early 2000s, using a conceptual framework to identify the key channels through which different types of infrastructure impact jobs. Where relevant, it highlights the different approaches and findings in the cases of energy, digital, and transport infrastructure. Overall, the literature review provides strong evidence of infrastructure’s positive impact on employment, particularly for women. In the case of electricity, this impact arises from freeing time that would otherwise be spent on household tasks. Similarly, digital infrastructure, particularly mobile phone coverage, has demonstrated positive labor market effects, often driven by private sector investments rather than large public expenditures, which are typically required for other large-scale infrastructure projects. The evidence on structural transformation is also positive, with some notable exceptions, such as studies that find no significant impact on structural transformation in rural India in the cases of electricity and roads. Even with better market connections, remote areas may continue to lack economic opportunities, due to the absence of agglomeration economies and complementary inputs such as human capital. Accordingly, reducing transport costs alone may not be sufficient to drive economic transformation in rural areas. The spatial dimension of transformation is particularly relevant for transport, both internationally—by enhancing trade integration—and within countries, where economic development tends to drive firms and jobs toward urban centers, benefitting from economies scale and network effects. Turning to organizational transformation, evidence on skill bias in developing countries is more mixed than in developed countries and may vary considerably by context. Further research, especially on the possible reasons explaining the differences between developed and developing economies, is needed.
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 From Patriarchy to Policy(Washington, DC: World Bank, 2025-05-29)Legal institutions play an important role in shaping gender equality in economic domains, from inheritance to labor markets. But where do gender equal laws come from? Using cross-country data on social norms and legal equality, this paper investigates the socio-cultural roots of gender inequity in the legal system and its implications for female labor force participation. To identify the impact of social norms, the analysis uses an empirical strategy that exploits pre-modern differences in ancestral patriarchal culture as an instrument for present-day gender norms. The findings show that ancestral patriarchal culture is a strong predictor of contemporary norms, and conservative social norms are associated with more gender inequality in the de jure legal framework, the de facto implementation of laws, and the labor market. The paper presents evidence for a political selection mechanism linking norms to laws: countries with more conservative norms elect political leaders who are more hostile to gender equality, who then pass less progressive legislation. The results highlight the cultural roots and political drivers of legalized gender inequality.Publication Yield Gains from Balancing Fertilizer Use(Washington, DC: World Bank, 2025-05-29)As with most agricultural inputs, the optimal use of fertilizer leverages the production complementarities between different types of nutrients. Wide variation in the intensity of nutrient application rates suggests there are potentially large productivity gains to be had from rebalancing fertilizer use across nutrient types even under a fixed expenditure budget. Using detailed information on a large sample of rice fields across three states in eastern India, this paper investigates whether a more balanced use of fertilizer—measured as the ratio of potash to nitrogen applied to a field—can lead to higher yields and revenues. To address the endogeneity of fertilizer application decisions, the analysis exploits the fact that nitrogen-based fertilizers demanded by Indian farmers are mostly produced domestically in a limited number of manufacturing plants, while all potash-based fertilizers must be imported by ship from abroad. Instrumenting for the ratio of potassium-to-nitrogen fertilizer applied on a field with the relative travel distances between farmers’ villages and both the nearest urea production plant and the nearest international port, the paper estimates the impact of more balanced fertilizer use on yields and revenues. The estimates show that at median levels of fertilizer use, and keeping the level of expenditure on fertilizers constant, rebalancing fertilizer application choices such that the potassium-to-nitrogen ratio of fertilizer is doubled would lead to a 4.8 percent increase in yield.Publication Rethinking Fiscal Policies(Washington, DC: World Bank, 2025-05-27)This paper examines the redistributive impact of fiscal policy—specifically taxes and transfers—on poverty and inequality in eight countries in the Middle East and North Africa: the Arab Republic of Egypt, Djibouti, the Islamic Republic of Iran, Iraq, Jordan, Morocco, Tunisia, and the West Bank and Gaza. Utilizing the Commitment to Equity framework, the analysis evaluates how fiscal interventions alter income distribution across these diverse national contexts. The results indicate that direct cash transfers and social assistance programs are generally effective in reducing poverty and shielding vulnerable populations, while in-kind benefits—particularly in education and healthcare—significantly contribute to mitigating income inequality. In contrast, generalized subsidies, especially in the energy sector, are fiscally burdensome and largely regressive, offering limited equity gains. Indirect taxes, although important for revenue generation, often exacerbate income disparities. The study underscores the need for comprehensive fiscal reforms, including the expansion of well-targeted transfers, adoption of progressive taxation, and reallocation of inefficient subsidies toward investments in human capital. Successful initiatives, such as Egypt’s Takaful and Karama and Jordan’s Takaful and bread subsidy compensation programs, illustrate scalable models of effective redistribution. Moreover, the Islamic Republic of Iran’s progressive tax policies highlight viable pathways to equitable revenue mobilization. Strengthening investment in education and health is essential for promoting long-term equity, enhancing upward mobility, and supporting inclusive and sustainable development across the region.Publication Beyond Aggregates(Washington, DC: World Bank, 2025-05-21)This paper develops a bottom-up, sector-specific approach to modeling potential output that overcomes limitations of traditional top-down estimates for long-term projections and policy analysis. The model disaggregates total-factor productivity (TFP) growth into within-sector productivity effects and between-sector reallocations. Such endogenous between effects capture structural transformation, notably the shift from low-productivity sectors like agriculture to higher-productivity industrial and service sectors—a key driver of growth in developing countries. At the heart of the framework, wedges in sectoral factor prices, substitution elasticities, and productivity differentials describe the contribution of between-effects to aggregate productivity. Although the approach here can be applied to any macro-structural model, its benefits are illustrated by introducing it into the World Bank’s semi-structural models for Ghana and the Kyrgyz Republic to showcase its potential to enhance the analysis of long-run growth dynamics through structural change.Publication Tradeoffs over Rate Cycles(Washington, DC: World Bank, 2025-05-23)Central banks often face tradeoffs in how their monetary policy decisions impact economic activity (including employment), inflation and the price level. This paper assesses how these tradeoffs have evolved over time and varied across countries, with a focus on understanding the post-pandemic adjustment. To make these comparisons, we compile a cross-country, historical database of “rate cycles” (i.e., easing and tightening phases for monetary policy) for 24 advanced economies from 1970 through 2024. This allows us to quantify the characteristics of interest rate adjustments and corresponding macroeconomic outcomes and tradeoffs. We also calculate Sacrifice Ratios (output losses per inflation reduction) and document a historically low “sacrifice” during the post-pandemic tightening. This popular measure, however, ignores adjustments in the price level—which increased by more after the pandemic than over the past four decades. A series of regressions and simulations suggest monetary policy (and particularly the timing and aggressiveness of rate hikes) play a meaningful role in explaining these tradeoffs and how adjustments occur during tightening phases. Central bank credibility is the one measure we assess that corresponds to only positive outcomes and no difficult tradeoffs.