The Impact of Natural Resources Rent and Political Development on Central Bank Independence: Evidence from Oil Exporting Countries

اقتصاد پولی مالی

Article 8, Volume 27, Issue 19, June 2021, Pages 193-222   

Document Type: پژوهشی

DOI: 10.22067/pm.v27i19.85422

Authors

Sajjad faraji dizaji^{* 1}; Hossein Sadeghi²; Zahra Lotfi³

¹Assistant Professor, Department of Economic Development and Planning, Faculty of Management and Economics, Tarbiat Modares University

²Associate Professor, Department of Economic Development and Planning Faculty of Management and Economics, Tarbiat Modares University

³Master of Energy Economics Faculty of Management and Economics, Tarbiat Modares University

Abstract

Introduction
The central bank, as the highest monetary authority in the country, needs independence to achieve its goals. Central bank independence reflects the ability and willingness to pursue an independent monetary policy. The main goal of the central bank is to control sustainable inflation. If the goal of a country is to reduce inflation without harming economic growth, there is no choice but to establish an independent central bank, only an independent central bank that will be able to reduce the budget deficit and inflation tax. Given the role of the Central Bank, this article intends to examine the effect of rent and political development on the independence of the Central Bank.
 
Theoretical frame work
The central bank, as an influential institution in monetary policy, needs independence to achieve its goals. Any obstacle that takes the money supply out of the central bank's control has called into question its independence. The main element of this independence is the credit limit that the bank imposes on the government. Therefore, if the central bank has enough independence, it will be able to prevent the government from borrowing freely. The most important reason the government borrows from the central bank is the budget deficit. This is especially true in oil-exporting countries, which often base their budget revenues on oil export. As a result, these governments resort to borrowing from the central bank to compensate for their budget deficit, and governments continue to inflate, willingly or unwillingly, by providing a deficit of central bank resources. In the meantime, the existence of strong and efficient political institutions makes it impossible for the government to question the independence of the central bank by pressuring the central bank in pursuit of its short-term and temporary goals, and to destabilize the country's economic future. In oil economies, governments have no incentive to impose higher taxes on the back of huge oil revenues, so they seek to achieve their short-term goals by resorting to the above methods and resorting to inflation taxes. What makes the difference between resource-rich countries is the quality of political institutions. If a public bureaucracy is reliable and corruption is low in a country, natural resources are not only not an obstacle to economic growth but also contribute to the growth of the economy.
Methodology
Therefore, this study examines the effect of natural resource rents, political development and their interactive effect on central bank independence in oil exporting countries. For this purpose, we use the panel data method for annual data related to 25 countries benefiting from oil rents  from 2000 to 2012. In addition to examining the effect of oil rents and political development and the simultaneous effect of these two variables on central bank independence, the effects of other rents, including gas rents, forest rents, and total natural resource rents, have also been examined .Also the impact of liquidity, government spending, transparency and development has also been addressed.
Results & Discussion
The results show that the entry of oil rents into the economy not only does not increase the independence of the central bank but also the government's access to an easy and carefree source of income leads to autonomy. The more the government relies on oil rents, the more it prevents the central bank from gaining independence and hindering the free and rational operation of this institution, and the more the government does not comply with the central bank's monetary policies in order to advance economic goals. But there is a positive relationship between central bank independence and improving the quality of political institutions. Also, the simultaneous effect of oil rents and development will diminish the effect of political institutions, and the quality of political institutions will be weakened due to oil dependence, and the indicators of autocracy will become more prominent, which will reduce the independence of the central bank. In addition, we saw a significant inverse relationship between liquidity, government spending and GDP on central bank independence, but increasing transparency, with a positive impact on central bank independence, improves central bank independence. In this regard, the impact of other rents on the independence of the central bank has been studied. The results of this study show that gas and forest rents do not have a significant effect on central bank independence, but the effect of total rents on central bank independence is the similar of oil rents. It can be argued that since the selected countries are mostly oil exporting countries and the predominant rent in these countries is oil rent and the basis of government economic programs in these countries is oil based, the impact of this rent is more than other rents.
Conclusions & Suggestions
According to the results of the study, the increase in rent  income reduces the independence of the central bank. For this reason, it is suggested to increase the independence of the central bank to prevent the entry of any rent, especially oil rent, which is the most effective type of rent in oil countries. The overflow of this revenue to the government budget has caused the government to rely on it and become independent of other institutions and make autonomous decisions.The first step is to take the right approach to budgeting and increase the central bank's authority to adopt monetary policy. Also, increasing the quality of institutions increases the independence of the central bank. Therefore, it is suggested that effective and fruitful steps be taken to improve the quality of institutions, so that we can see better and more principled performance of the central bank and more independence of this institution Let our decisions be against the government.Also, increasing the quality of institutions increases the independence of the central bank. Therefore, it is suggested that effective and fruitful steps be taken to improve the quality of institutions,so that we can see better and more principled performance of the central bank and more independence of this institution.
 

Keywords

Central Bank Independence; Oil Revenue; political development

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