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The Choice of 'Conservative' Bankers in Open Economies: Monetary Regime Options for Europe

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  • Currie, David
  • Levine, Paul
  • Pearlman, Joseph

Abstract

That governments should delegate the operation of monetary policy to independent central banks is widely advocated. For a closed economy, the optimal choice results in a banker who is more conservative than the representative government, assigning a lower weight on output in her welfare function, but not overconservative, thereby allowing monetary policy to adjust to shocks. However, for open economies, the exchange rate externality results in an inefficient Nash equilibrium to this 'delegation game.' Monetary union or cooperation in the optimal choice of banker can internalize the externality. These options are assessed under symmetric and asymmetric shocks assuming different levels of fiscal transfers. Copyright 1996 by Royal Economic Society.

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  • Currie, David & Levine, Paul & Pearlman, Joseph, 1996. "The Choice of 'Conservative' Bankers in Open Economies: Monetary Regime Options for Europe," Economic Journal, Royal Economic Society, vol. 106(435), pages 345-358, March.
    • Handle: RePEc:ecj:econjl:v:106:y:1996:i:435:p:345-58
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    Cited by:

    1. Paul Levine & Joseph Pearlman & Richard Pierse, 2007. "Monetary Policy Coordination Revisited in a Two-Bloc DSGE Model," School of Economics Discussion Papers 0907, School of Economics, University of Surrey.
    2. Currie, David & Levine, Paul L & Rickman, Neil, 1999. "Delegation and the Ratchet Effect: Should Regulators Be Pro-Industry?," CEPR Discussion Papers 2274, C.E.P.R. Discussion Papers.
    3. Spagnolo, G., 1999. "Issue Linkage, Delegation, and International Policy Cooperation," Cambridge Working Papers in Economics 9913, Faculty of Economics, University of Cambridge.
    4. al-Nowaihi, Ali & Levine, Paul, 1998. "Can political monetary cycles be avoided?," Journal of Monetary Economics, Elsevier, vol. 42(3), pages 525-545, October.
    5. Paul Levine & Joseph Pearlman & Bo Yang, 2008. "The Credibility Problem Revisited: Thirty Years on from Kydland and Prescott," Review of International Economics, Wiley Blackwell, vol. 16(4), pages 728-746, September.
    6. Jensen, Henrik, 2000. "Optimal monetary policy cooperation through state-independent contracts with targets," European Economic Review, Elsevier, vol. 44(3), pages 517-539, March.
    7. Paul Levine & Joseph Pearlman, 2002. "Delegation and Fiscal Policy in the Open Economy: More Bad News for Rogoff's Delegation Game," Open Economies Review, Springer, vol. 13(2), pages 153-174, April.
    8. Brian M. Doyle & Joseph E. Gagnon & Dale W. Henderson & Laurence H. Meyer, 2002. "International coordination of macroeconomic policies: still alive in the new millennium?," International Finance Discussion Papers 723, Board of Governors of the Federal Reserve System (U.S.).
    9. Ali al-Nowaihi & Paul Levine & Alex Mandilaras, 2006. "Central Bank Independence and the `Free Lunch Puzzle': A New Perspective," School of Economics Discussion Papers 0806, School of Economics, University of Surrey.

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