Beyond Stability: The Political Sources of Widening Central Bank Mandates in Developing Countries

While many developing countries witnessed significant central bank interventions to promote financial deepening in the three decades after the Second World War, the 1980s and 1990s saw a sea change, with central banking becoming oriented towards the promotion of stability in prices and the financial sector. Yet since the global financial crisis put the role of central banks back on the negotiating table and opened a window of opportunity to reform central bank mandates, the pendulum has swung back and many central banks in developing countries have again increased the emphasis placed on the goal of financial deepening. Much of the explanation for the renewed emphasis on financial deepening lies in changes in the domestic sphere that made growth-oriented policies more attractive to political elites. There is however also an international dimension to the same process. This paper argues that, in addition to the concerns of political leaders to maintain popular support, a shift in the consensus in the International Monetary Fund (IMF) and the World Bank about the mandates of central banks helps explain the greater orientation of central bank policy in developing countries towards financial deepening in recent years. The change of ideas about the role of central banks reflects a process of social learning among IMF and World Bank Staff. A case study of central bank policy in Uganda and cross-country statistical data on central bank policy stances in developing and emerging economies provide preliminary evidence to explore the proposed relationship between domestic politics, ideas and the widening of central bank mandates in developing countries.