This paper studies the role of the International Monetary Fund (IMF) in promoting central bank independence (CBI). While anecdotal evidence suggests that the IMF has been playing a vital role for CBI, the underlying mechanisms of this influence are not well understood. We argue that the IMF has ulterior motives when pressing countries for increased CBI. First, IMF loans are primarily transferred to local monetary authorities. Thus, enhancing CBI aims to insulate central banks from political interference to shield loan disbursements from government abuse.Second, several loan conditionality clauses imply a substantial transfer of political leverage over economic policy making to monetary authorities. As a result, the IMF through pushing for CBI seeks to establish a politically insulated veto player to promote its economic policy reform agenda. We argue that the IMF achieves these aims through targeted lending conditions. We hypothesize that the inclusion of these loan conditions leads to greater CBI. To test our hypothesis, we use a recently available dataset on IMF programs that includes detailed information on CBI reforms and IMF conditionality for up to 124 countries between 1980 and 2012. Our findings indicate that targeted loan conditionality plays a critical role in promoting CBI. These results are robust towards varying modeling assumptions and withstand a battery of robustness checks. * We are grateful to Jan-Egbert Sturm, three anonymous reviewers, and the editors at the European Journal of Political Economy for providing excellent comments and suggestions. We also want to thank Sharat Ganapati, Irfan Nooruddin, Nita Rudra, Gerald Schneider, and Carole Sargent for very helpful comments. We are also thankful for feedback from the participants in seminars at the European Central Bank, Georgetown University, and the IR research cluster at the University of Glasgow. Caitlin Chamberlain provided outstanding research assistance. All errors remain ours.

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