ABSTRACT
Actual central bank independence in middle-income developing countries varies with a country's need for credit and investment, as perceived by government politicians. Politicians try to signal their country's creditworthiness by ceding central bank discretion and recognizing central bank authority. Politicians seek creditworthiness in the eyes of international investors to improve the quantity and price of financial resources offered to their country. The effectiveness of efforts to increase creditworthiness will vary with the predominant form of international financial intermediation. The chapter considers four types of international investors: foreign direct investors, equity investors, international bank lenders, and purchasers of foreign government bonds. Politicians' use of central bank independence to increase creditworthiness also rises with more extensive financial liberalization for the host country and longer effective time horizons and tenure security for its leaders. Foreign direct investors should not be very responsive to changes in the general macroeconomic policy environment, which is what change in central bank independence signals.
