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Political Consensus, Uncertain Preferences, and Central Bank Independence

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  • Muscatelli, V Anton

Abstract

Models where monetary policy is delegated to an independent central bank using contracts or targets usually assume that the preferences of the principal and the agent are known with certainty. However, if there is no consensus in society about the relative costs of inflation and output stabilization, the delegation solution may not produce a better outcome for the median voter than discretion. This paper examines the robustness of the institutional solutions to the credibility problem with uncertain preferences. The author also examines the related issue of whether political parties have an interest in moving towards central bank independence. Copyright 1998 by Royal Economic Society.

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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 50 (1998)
Issue (Month): 3 (July)
Pages: 412-30

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Handle: RePEc:oup:oxecpp:v:50:y:1998:i:3:p:412-30

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  1. Canzoneri, Matthew B & Nolan, Charles & Yates, Tony, 1996. "Mechanisms for Achieving Monetary Stability: Inflation Targeting Versus the ERM," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1418, C.E.P.R. Discussion Papers.
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  4. Fratianni, Michele & von Hagen, J├╝rgen & Waller, Christopher, 1993. "Central Banking as a Political Principal-Agent Problem," CEPR Discussion Papers, C.E.P.R. Discussion Papers 752, C.E.P.R. Discussion Papers.
  5. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, American Economic Association, vol. 82(1), pages 273-86, March.
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  7. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 53-84, December.
  8. Svensson, L.E.O., 1995. "Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts," Papers, Stockholm - International Economic Studies 595, Stockholm - International Economic Studies.
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  11. Charles Nolan & Eric Schaling, 1996. "Monetary Policy Uncertainty and Central Bank Accountability," Bank of England working papers, Bank of England 54, Bank of England.
  12. Muscatelli, Vito Antonio & Spinelli, Franco, 1996. "Gibson's Paradox and Policy Regimes: A Comparison of the Experience in the US, UK and Italy," Scottish Journal of Political Economy, Scottish Economic Society, Scottish Economic Society, vol. 43(4), pages 468-92, September.
  13. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 25(2), pages 151-62, May.
  14. Al-Nowaihi, A & Levine, Paul L, 1996. "Independent but Accountable: Walsh Contracts and the Credibility Problem," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1387, C.E.P.R. Discussion Papers.
  15. Herrendorf, Berthold & Lockwood, Ben, 1997. "Rogoff's "Conservative" Central Banker Restored," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 29(4), pages 476-95, November.
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  17. McCallum, Bennett T, 1995. "Two Fallacies Concerning Central-Bank Independence," American Economic Review, American Economic Association, American Economic Association, vol. 85(2), pages 207-11, May.
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  20. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(4), pages 1169-89, November.
  21. Alesina, Alberto & Gatti, Roberta, 1995. "Independent Central Banks: Low Inflation at No Cost?," American Economic Review, American Economic Association, American Economic Association, vol. 85(2), pages 196-200, May.
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  23. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-Party System as a Repeated Game," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(3), pages 651-78, August.
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  25. Lossani, Marco & Natale, Piergiovanna & Tirelli, Patrizio, 1998. "Incomplete Information in Monetary Policy Games: Rules Rather Than a Conservative Central Banker," Scottish Journal of Political Economy, Scottish Economic Society, Scottish Economic Society, vol. 45(1), pages 33-47, February.
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Cited by:
  1. V. Anton Muscatelli & Julia Darby & Chol-Won Li, . "Political Uncertainty, Public Expenditure and Growth," Working Papers, Business School - Economics, University of Glasgow 9822, Business School - Economics, University of Glasgow.
  2. Beetsma, Roel M.W.J. & Lans Bovenberg, A., 2006. "Political shocks and public debt: The case for a conservative central bank revisited," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 30(11), pages 1857-1883, November.

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