Independent central banks and banking crisis liquidity

This study develops and tests a formal model that shows why central banks protected from direct government borrowing supply a larger financial safety net for commercial banks during a crisis. This result is derived from a novel model of central bank independence grounded in the rules governing access to the central bank's balance sheet, rather than in the politics of inflation. Subsequent analysis shows that this result is mediated by the degree of leverage in the banking system, but only in democracies where government borrowing restrictions are credible. Supporting quantitative evidence comes from an event study on a large sample of emerging market banking crises between 1980-2009.