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Does Conservatism Matter? A Time Series Approach to Central Banking

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  • Helge Berger
  • Ulrich Woitek

Abstract

The empirical literature on central banking has found measures of central bank independence/conservatism to be negatively correlated with inflation and inflation variance across countries. But the cross-country approach has been criticised for its focus on policy outcomes instead of policies, and for the unsystematic conflation of the concepts of independence and conservatism. We avoid these shortcomings by estimating a single-country time series model for the German Bundesbank. We find that an increase in central bank conservatism leads to higher short-term interest rates and a more activist stabilisation policy with respect to macroeconomic shocks. More conservative Bundesbank regimes are associated with a less volatile economy, higher output and somewhat lower inflation. We also investigate the interaction between the central bank and the government. It turns out that non-conservative Bundesbank Councils react more strongly to macroeconomic shocks under conservative than under non-conservative government regimes.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 190.

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Date of creation: 1999
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Handle: RePEc:ces:ceswps:_190

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Keywords: Central Bank Independence and Conservatism; Monetary Policy; Central Bank Government Relations; Generalised Impulse Responses;

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References

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Cited by:
  1. Miguel Rueda, 2008. "Breaking Credibility in Monetary Policy: The Role of Politics in the Stability of the Central Banker," Research Department Publications 4585, Inter-American Development Bank, Research Department.
  2. Miguel Rueda, 2008. "Credibilidad en la polĂ­tica monetaria: Papel de polĂ­ticas en la estabilidad del Presidente del Banco Central," Research Department Publications 4586, Inter-American Development Bank, Research Department.
  3. Helge Berger & Thomas Harjes, 2009. "Does Global Liquidity Matter for Monetary Policy in the Euro Area?," IMF Working Papers 09/17, International Monetary Fund.
  4. Helge Berger & Jakob Haan, 2002. "Are small countries too powerful within the ECB?," Atlantic Economic Journal, International Atlantic Economic Society, vol. 30(3), pages 263-282, September.

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