Sending the Right Signals: Using Rent-Seeking Theory to Analyze the Cuban Central Bank
43 Pages Posted: 10 Jun 2005
Despite federal constraints on Cuban area studies, academic interest in legal aspects of the Cuban economy is growing. This Article considers how central bank governance structure - specifically that of the Cuban Central Bank - operates as an investment signal to potential foreign investors with respect to the term of their potential investments. Although rejecting the conventional explanation that central bank independence signals low inflation expectations, the Article argues 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. The Cuban Central Bank is not independent and, hence, does not send a favorable term signal to financial firms considering investment. Recognizing the value of the right signals, this Article proposes that Cuba may replicate some of the signaling value of central bank independence through issuing collateralized government securities. Such a transaction would help Cuba to rehabilitate its market credibility deficit and mitigate the effect of its legal disabilities under U.S. and other law.
Keywords: Cuba, rent-seeking, central bank, academic freedom, foreign investment, Johnson Act
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