Fiscal dominance and Central bank independence
Keywords:
Fiscal regime, Central bank autonomy, Seigniorage, Cointegration, Inflation, Public debt, Monetary policy, MacroeconomyAbstract
This study investigates the relationship between fiscal dominance and central bank independence within the framework of the Fiscal Theory of the Price Level, with a focus on Mongolia. The analysis employs a structural parameter, δ, which measures the proportion of government liabilities financed through fiscal resources relative to seigniorage financing. Using annual data from 27 countries over the period 1995–2022, the study applies the Dynamic Ordinary Least Squares (DOLS) method to estimate the long-run cointegrating relationship among money supply, nominal consumption, and public debt. The empirical findings reveal significant cross-country heterogeneity: developed economies exhibit a high average δ value of approximately 0.89, while developing economies show a lower average value of around 0.54, indicating stronger fiscal dominance. Mongolia’s estimated δ value of approximately 0.71 suggests a regime of partial fiscal dominance, where a meaningful share of government debt is indirectly supported through monetary financing. In addition, the Vector Error Correction Model (VECM) results confirm that fiscal variables exert persistent long-run effects on inflation dynamics. The study’s main contribution lies in providing the first empirical assessment of fiscal dominance and central bank independence in Mongolia under the FTPL framework. The findings highlight the importance of fiscal discipline and policy coordination for maintaining monetary credibility and macroeconomic stability.
JEL ангилал: E31, E42, E50, E63
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