Central bank independence and fiscal rule under populist leader's regime

Abstract

This study examines the relationship between fiscal rules, populist leadership, and central bank independence. It posits that populist leaders, driven by the desire to stimulate economic activity and gain public approval through short-term expansionary policies, are more inclined to undermine central bank independence when they are constrained by fiscal rules. The findings reveal that fiscal constraints significantly increase the likelihood of weakened central bank independence under populist leadership, a result that remains robust across various model specifications. These effects are particularly pronounced in political contexts where populist leaders exert greater authority and encounter stronger incentives to prioritize monetary policy over fiscal measures. Moreover, the adverse impact on central bank independence is exacerbated when fiscal rules impose stricter constraints on short-term expenditures, with reduced independence primarily reflected in shifts in central bank policies. These results highlight the importance of political dynamics in fiscal and monetary institutions and emphasize the need for complementary measures to stabilize macroeconomic conditions through coordinated fiscal rules and central bank independence.