Working Paper BETA #2016-15

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Title : Central Bank Independence and the Dynamics of Public Debt?

Author(s) : Stephanos Papadamou, Moïse Sidiropoulos, Eleftherios Spyromitros

Abstract : Inspired from a simple theoretical macroeconomic model, proposed by Ozkan et al. (2010), which shows a positive link between public debt issues and central bank independence, we empirically investigate if central bank independence affects the way that net stock of government securities and public debt are altered by important macroeconomic variables. Our research has been focused on various levels of independence of the central bank of 22 countries from 1992 to 2000, where significant changes in the index of independence for a large number of central banks have been occurred. By applying dynamic panel data analysis, we show that central bank independence has a significant impact on the effects of deficit, GDP growth and government bonds yield on government bond issues and public debt. The latter result implies that higher levels of central bank independence make countries more affected by market conditions.

Key-words : Central bank independence, public debt, panel data.

JEL Classification : E52, E58.