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Bargaining over monetary policy in a monetary union and the case for appointing an independent central banker

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  • Corinne Aaron-Cureau
  • Hubert Kempf

Abstract

We set up a model of a monetary union where decisions over monetary policy are made through bargaining between two governments with different objectives. They can either choose to directly bargain over monetary policy or to delegate monetary decisions to an independent central banker. In the latter case, the choice of the central banker is obtained by bargaining between the two governments. We show that, the bargaining power being constant, the delegation of monetary policy to an independent central banker does not necessarily incur a smaller inflation bias nor is systematically welfare improving for any government. It may happen that both governments are better-off when they directly bargain. Copyright 2006, Oxford University Press.

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Bibliographic Info

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

Volume (Year): 58 (2006)
Issue (Month): 1 (January)
Pages: 1-27

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Handle: RePEc:oup:oxecpp:v:58:y:2006:i:1:p:1-27

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  1. Lockwood, Ben & Miller, Marcus & Zhang, Lei, 1998. "Designing Monetary Policy When Unemployment Persists," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 65(259), pages 327-45, August.
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  3. Waller, Christopher J., 1992. "A bargaining model of partisan appointments to the central bank," Journal of Monetary Economics, Elsevier, Elsevier, vol. 29(3), pages 411-428, June.
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  7. Lars E.O. Svensson, 1995. "Optimal Inflation Targets, `Conservative' Central Banks, and Linear Inflation Contracts," NBER Working Papers 5251, National Bureau of Economic Research, Inc.
  8. Jon Faust, 1992. "Whom can we trust to run the Fed? Theoretical support for the founders' views," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 429, Board of Governors of the Federal Reserve System (U.S.).
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  10. Faust, Jon, 1996. "Whom can we trust to run the Fed? Theoretical support for the founders' views," Journal of Monetary Economics, Elsevier, Elsevier, vol. 37(2-3), pages 267-283, April.
  11. 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.
  12. Christopher J. Waller, 2000. "Policy Boards And Policy Smoothing," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 115(1), pages 305-339, February.
  13. 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.
  14. McCallum, Bennett T., 1997. "Crucial issues concerning central bank independence," Journal of Monetary Economics, Elsevier, Elsevier, vol. 39(1), pages 99-112, June.
  15. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
  16. Forder, James, 1998. "The case for an independent European central bank: A reassessment of evidence and sources," European Journal of Political Economy, Elsevier, Elsevier, vol. 14(1), pages 53-71, February.
  17. Gartner, Manfred, 2000. " Political Macroeconomics: A Survey of Recent Developments," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 14(5), pages 527-61, December.
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Cited by:
  1. Etienne Farvaque & Norimichi Matsueda, 2008. "Monetary Unions and External Shocks," Discussion Paper Series, School of Economics, Kwansei Gakuin University 42, School of Economics, Kwansei Gakuin University, revised Oct 2008.
  2. Etienne Farvaque & Norimichi Matsueda, 2010. "On the Sustainability of a Monetary Union under External Shocks: a Theoretical Result and Its Application to the Gulf Countries," Discussion Paper Series, School of Economics, Kwansei Gakuin University 66, School of Economics, Kwansei Gakuin University, revised Dec 2010.
  3. H.J. Roelfsema, 2006. "Why are federal central banks more activist?," Working Papers, Utrecht School of Economics 06-06, Utrecht School of Economics.
  4. Hubert KEMPF, 2006. "The Constitutional Treaty of the EU and the institutional framework," Departmental Working Papers, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano 2006-05, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.

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