Central banks and civil war termination
| Author | Ana Carolina Garriga |
| DOI | http://doi.org/10.1177/00223433211038194 |
| Published date | 01 July 2022 |
| Date | 01 July 2022 |
| Subject Matter | Regular Articles |
Central banks and civil war termination
Ana Carolina Garriga
Department of Government, University of Essex (UK).
Affiliated professor, Department of Political Studies, CIDE (Mexico)
Abstract
The ability to finance conflict likely affects the odds of sustaining a war and succeeding in it. Recent literature explores
rebel group funding, but far less is known about how states finance their own war efforts. This article posits that the design
of central banks should affect civil war termination. In particular, it argues that central bank independence affects civil war
termination through two channels. First, financial markets consider central bank independence as a good signal in terms
of macroeconomic stability and debt repayment. In this way, independent central banks enhance the ability of the
government to access credit to finance and end a civil war. Second, central bank independence is associated with lower
inflation. Inflation control reduces one source of additional grievances that the civil war may impose on citizens. On a
sample of civil wars between 1975 and 2009, central bank independence is associated with a substantial increase in the
likelihood of war termination. When the form of termination is disaggregated, (higher) central bank independence is
associated with a higher probability of government victory, relative to continued conflict and to other outcomes.
Additional tests provide support for the argued mechanisms: during civil wars, countries with more independent central
banks access international credit markets in better conditions – i.e. they pay lower interest rates, and receive longer grace
and maturity periods on new debt. Furthermore, in countries experiencing civil wars, central bank independence is
associated with lower inflation.
Keywords
central banks, central bank independence, civil war termination, conflict finance, inflation, international finance
Introduction
The ability to finance conflict likely affects the odds of
sustaining a war and succeeding in it. Regarding civil wars,
a growing literature shows that rebel group funding has
important consequences (Fearon, 2004; Koren & Bagozzi,
2017; Sawyer, Cunningham & Reed, 2017; Whitaker,
Walsh & Conrad, 2019), but we know far less about how
governments fund their civil war efforts, or the conse-
quences of different forms of financing on civil conflict
dynamics. This article focuses on monetary institutions and
explains how central banks affect the likelihood and the
form of civil war termination.
Civil wars are the most frequent form of large-scale
violence (Collier, Hoeffler & Rohner, 2009). Thus, it is
relevant to know whether domestic – in this case,
monetary – institutions have the potential to shorten these
wars. There is evidence that central banks have important
effects on international war finance, and, indirectly, on
their outcomes. However, there are reasons to believe that
the incentives affecting the relations between central banks,
governments, and third parties are different in the context
of inter- and intrastate wars. Furthermore, the characteris-
tics of civil wars allow us to test the mechanisms through
which central banks affect economic and political
outcomes.
When governments face civil wars – as in other instances
that threaten their survival – there are incentives to use any
tool to survive. In particular, governments at war might
want to control monetary institutions to print money as
desired. I argue that by restricting the government’s
access to the printing press to meet immediate needs
of war finance, central bank independence does not
hamper the ability of governments to end a civil war.
Corresponding author:
carolina.garriga@essex.ac.uk
Journal of Peace Research
2022, Vol. 59(4) 508–525
ªThe Author(s) 2021
Article reuse guidelines:
sagepub.com/journals-permissions
DOI: 10.1177/00223433211038194
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Counterintuitively, independence of the central bank
strengthens the government in two fronts: it facilitates the
governments’ access to international financial markets,
and it limits the burden of the war on citizens through
inflation. This makes war termination, and government
victories, more likely.
This article contributes to two literatures. First, it speaks
to the literature on conflict finance. This study comple-
ments the literature on rebel group funding (Fearon, 2004;
Koren & Bagozzi, 2017; Sawyer, Cunningham & Reed,
2017; Whitaker, Walsh & Conrad, 2019), by showing that
government finance may also affect civil war outcomes.
More specifically, it explains the effect of domestic mone-
tary institutions on civil war dynamics. Although there is a
growing literature on the relationship between finance and
war (DiGiuseppe, Barry & Frank, 2012; Slantchev, 2012;
Shea, 2014; Shea & Poast, 2017), the role of central banks
during civil wars is underexplored. The few studies of
monetary institutions in war times focus on the effects of
the existence of central banks – but not on their institutional
characteristics – and in the context of interstate wars (Broz,
1998; Poast, 2015). This study builds on this literature,
and stresses that civil wars alter both the domestic incen-
tives to use monetary policy, and monetary institutions’
international credibility in ways that may differ from inter-
national wars. Furthermore, although the creation of cen-
tral banks had important consequences for war finance, the
institutional design and functions of central banks vary
significantly across countries and time. I focus on one of
the most salient characteristics of central banks, their inde-
pendence. Finally, no one has looked at how monetary
policy might affect war termination. I analyze how differ-
ences in central bank independence may affect the ability of
the government to finance the war, paving the way to
different civil war outcomes.
Second, this research also contributes to the literature
on central banking. Results show that central bank inde-
pendence produces its intended domestic and interna-
tional effects – namely, inflation control (Cukierman,
1992; Alesina & Summers, 1993; Bodea & Hicks,
2015a; Garriga & Rodriguez, 2020) and access to credit
markets (Maxfield, 1997; Bodea & Hicks, 2015b) –
even in contexts in which the government’s authority
is challenged, and in the presence of strong incentives
to override this institutional arrangement.
Existing research on financing warfare
Governments can finance their warfare efforts via taxa-
tion, domestic or international borrowing, and inflation
(Seligman, 1918; Cappella Zielinski, 2016; Carter &
Palmer, 2016).
1
An important literature analyzes why
governments choose different strategies to finance inter-
national wars. Generally speaking, countries with cred-
ibility to borrow can postpone the burden of war costs on
their citizens, and countries with lower credit costs are
more likely to win their interstate wars (Slantchev, 2012;
Shea, 2014, 2016; DiGiuseppe, 2015a, b). Countries
with poor reputations need to rely on taxation or infla-
tion (Bordo & White, 2009).
Research suggests that the very purpose of the first cen-
tral banks was to finance international wars (Broz, 1998;
Poast, 2015). Those central banks worked as commitment
devices toward domestic creditors, and enhanced the ability
to borrow from domestic banks at lower interest rates,
especially during wars (Broz & Grossman, 2004; Poast,
2015). Although the functions of central banks have
evolved, independent central banks have credibility-
enhancing effects on international credit markets (Max-
field, 1997; Bodea & Hicks, 2015b, 2018) that are
comparable to adherence to the Gold Standard in the past
(Bordo & Rockoff, 1996).
As I will explain later, the determinants and effects of
different types of conflict finance are likely different for
intrastate wars. Yet, government finance in civil wars is less
studied. Most research on civil war finance focuses on rebel
funding, and finds that access to economic resources –
whether it is natural resources in general (Lujala, 2010),
gems and narcotics (Fearon, 2004), remittances (Ballentine
& Sherman, 2003), or third-party support (Sawyer, Cun-
ningham & Reed, 2017) – make civil wars last longer.
Resources allowing longer fights do not necessarily forecast
rebel victories (Weinstein, 2005). Regarding the govern-
ment side, foreign funding, often categorized as ‘interven-
tions’, can also lengthen civil wars, in part because it can
encourage other funders to support the rebels (Regan,
2002), or because it increases uncertainty regarding the
other side’s relative strength (Narang, 2015). In contrast,
sanctions shorten civil wars and affect the mode of termi-
nation (Escriba
`-Folch, 2010). Overall, rebel-funding types
seem important for the outcomes of civil conflicts, but we
know less about how state funding – and more specifically,
monetary institutions – influence civil wars.
A theory of central bank independence
and civil war termination
Central banks are key institutions for a country’s econ-
omy. They affect the money supply in the economy,
1
Foreign aid can also help to fund war. However, it depends more on
the decision of donors than of the recipients.
Garriga 509
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