Governments under siege? Re-thinking the underpinnings of central bank reform in the EU periphery

This study investigates the political economy of central bank reform in the peripheral EU zone. Governments in emerging markets find it hard to cut down their deficits and restrain their fiscal spending in line with low inflation targets set by an autonomous central bank, which prioritizes price stability. However, we see that many ruling politicians, despite the electoral costs, agree to implement this institutional reform and make their central bank independent. What makes ruling politicians in emerging markets accede to central bank reform, and thus, delegate their economic policy-making authority to an autonomous entity, when such a decision is likely to clash with their interests? Moreover, why do we see differential levels of central bank autonomy in these countries? What explains the variation in outcome? The study is an attempt to address these questions with focus on central bank reform process in Hungary and Turkey.;In striking contrast to previous research, this study finds that supranational actors exert a substantial influence in the exercise of central bank reform in emerging markets of the EU zone. By analyzing the IMF Stand-By Programs and the EU Commission Reports of the 1991-2007 era, I code the variation in Central Bank Laws of these two countries over time and demonstrate how the prospects of central bank reform expand once international institutions provide necessary material incentives as in the form of economic loans (the IMF), and/or membership candidacy (the EU).;As for the variation in the level of autonomy that central banks hold, this study argues that differential costs of central bank reform in the eyes of ruling politicians help us understand whether the resultant reform fulfills the criteria set by international institutions or remains partial, which subordinates the central bank to governments not only in targeting inflation rates but also choosing the monetary instruments to sustain these targets. This study contributes to literature on political economy of monetary institutions by offering an original explanation on determinants of central bank reform in emerging markets.