Socio-political and economic determinants of de facto monetary institutions and inflationary outcomes

In this paper we estimate a model where in°ation, a measure of de facto central bank independence and an index of de facto exchange rate regime are simultaneously determined by a set of economic, political and institutional variables. De facto central bank independence is hampered by socio-political turbulence and bene¯ts from the balance of powers between the executive and the parliament. In°ation is explained by de facto central bank independence, by the level and volatility of public expenditure and by the de facto exchange rate regime. Openness (real and ¯nancial) a®ects in°ation through the ex- change rate regime channel. Success in controlling in°ation, in turn is crucial to sustain central bank independence and exchange rate stability.