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Central Banking as a Political Principal-Agent Problem

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Author Info
Fratianni, Michele
von Hagen, Jurgen
Waller, Christopher J

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Abstract

Due to their ties with elected leaders, central bankers may pursue policies that are not in society's best interests. Consequently, the relationship between the public and the central bank can be characterized as a principal-agent problem. An inflation and stabilization bias arise as a result of this agency problem and the magnitudes of these biases depend on the political environment. Various institutional proposals for eliminating these biases are examined and the authors find that central bank independence and performance contracts work best. However, they argue that central bank independence is preferable for resolving the agency problem. Copyright 1997 by Oxford University Press.

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Publisher Info
Article provided by Oxford University Press in its journal Economic Inquiry.

Volume (Year): 35 (1997)
Issue (Month): 2 (April)
Pages: 378-93
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Handle: RePEc:oup:ecinqu:v:35:y:1997:i:2:p:378-93

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  1. Herrendorf, B. & Neumann, M.J.M., 1998. "A non-Normative Theory of Inflation and Central Bank Independence," The Warwick Economics Research Paper Series (TWERPS) 515, University of Warwick, Department of Economics. [Downloadable!]
  2. Berthold Herrendorf & Manfred Neumann, 2000. "A nonnormative theory of inflation and central bank independence," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 136(2), pages 315-333, June. [Downloadable!] (restricted)
  3. Ugo Panizza, 1997. "Optimal Contracts for Central Bankers: Inflation versus Money Supply and Exchange Rate Targets," Open Economies Review, Springer, vol. 8(1), pages 5-29, January. [Downloadable!] (restricted)
  4. Laurent GAGNOL & Moise SIDIROPOULOS, 2001. "The policy mix in a monetary union under alternative policy institutions and asymmetries," Working Papers of BETA 2001-23, Bureau d'Economie Théorique et Appliquée, ULP, Strasbourg. [Downloadable!]
  5. Gustavo Piga, 2005. "On the Sources of the Inflation Bias and Output Variability," CEIS Research Paper 66, Tor Vergata University, CEIS. [Downloadable!]
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  6. Georgios E. Chortareas & Stephen M. Miller, 2002. "Central Banker Contracts, Incomplete Information, and Monetary Policy Surprises: In Search of a Selfish Central Banker?," Working papers 2002-29, University of Connecticut, Department of Economics. [Downloadable!]
    Other versions:
  7. Anton Muscatelli, 1996. "Political Consensus, Uncertain Preferences and Central Bank Independence," Working Papers 9615, Department of Economics, University of Glasgow, revised Nov 1996.
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  8. Georgios E. Chortareas & Stephen M. Miller, 2000. "Optimal Central Banker Contracts and Common Agency," Working papers 2000-03, University of Connecticut, Department of Economics, revised Jun 2002. [Downloadable!]
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  9. Lars E.O. Svensson, 1997. "Optimal Inflation Targets, `Conservative' Central Banks, and Linear Inflation Contracts," NBER Working Papers 5251, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Reiner Eichenberger & Sergio Rossi, 2004. "Die Deregulierung der Zentralbanken: Auf zu einem internationalen Markt für gute Geldpolitik!," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(III), pages 327-353, September. [Downloadable!]
  11. Brigitte Godbillon & Moïse Sidiropoulos, 2001. "Designing Fiscal Institutions in a Monetary Union," Open Economies Review, Springer, vol. 12(2), pages 163-179, April. [Downloadable!] (restricted)
  12. Donato Masciandaro, 1995. "Designing a central bank: Social player, monetary agent, or banking agent?," Open Economies Review, Springer, vol. 6(4), pages 399-410, October. [Downloadable!] (restricted)
  13. Berthold Herrendorf & Manfred J.M. Neumann, 2003. "The Political Economy of Inflation, Labour Market Distortions and Central Bank Independence," Economic Journal, Royal Economic Society, vol. 113(484), pages 43-64, January. [Downloadable!] (restricted)
  14. Hans Peter Grüner, 2002. "Should central banks really be flexible?," Working Paper Series 188, European Central Bank. [Downloadable!]
  15. Paolo Savona, 2006. "Michele Fratianni’s Professional Career and Contributions to Economic Analysis," Open Economies Review, Springer, vol. 17(4), pages 365-371, December. [Downloadable!] (restricted)
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