Document Type

Article

Publication Date

2005

Excerpt

This Article considers how central bank governance structure operates as an investment signal to potential foreign investors with respect to the term of their potential investments. All though rejecting the conventional explanation that central bank independence signals low inflation, this discussion shows that central bank independence does send a favorable investment signal because independence shows official openness to opportunistic deal making (rent-seeking) with financial firms for a longer term than deals possible with a dependent central bank. It further shows that the Cuban Central Bank is not independent and hence, does not send a favorable investment signal to financial firms considering investment with respect to term. Recognizing that proper financial signals induce foreign investment, this Article proposes that Cuba may replicate some of the signaling value of central bank independence through issuing collateralized government securities. This Article recommends complementary reforms to the Cuban and U.S. governments that would increase the Cuban Central Bank's financial signaling capabilities.

Part I suggests that the signaling value of central bank independence in developing countries reflects the value of potential rent-seeking between foreign investors and officials, rather than expectations of low inflation. Part II describes Cuba's access to foreign financing in the form of foreign direct investment and credit flows and explains how Cuban monetary policy has inhibited increased foreign financing. Part III explains how the governance structure of the Cuban Central Bank signals that the institution is not formally or substantively independent of oversight from other governmental actors. Part IV urges the Central Bank to issue collateralized governmental debt to replicate- albeit only at the transactional level-some of the signaling benefits of central bank independence. To complement this proposal, Part V identifies crucial changes to U.S. law which could improve Cuba's capacity to manage its public financing on market terms. Part VI concludes by inviting other scholars to encourage constructive discourse on Cuban credit market structure.

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