The Independence of Central Banks, Political Institutional Quality and Financial Sector Development in Africa

Abstract

Central Bank Independence (CBI) as a mechanism for achieving lower inflation and effective regulation and supervision of the financial sector should promote financial sector development. Though there is not much difference in CBI legal provisions, it seems to be more effective in developed countries than in African countries. There are suggestions that this could be due to differences in political institutional quality. Using panel data from 1970 to 2012, we find that CBI does not promote financial development in Africa. The impact of CBI is dependent on the level of development of a country. CBI promotes financial development more in countries with strong political institutions. JEL codes: E02; E44; E58