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Central Bank Independence and Conservatism under Uncertainty: Substitutes or Complements?

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  • Carsten Hefeker
  • Blandine Zimmer

Abstract

The paper examines the optimal combination of central bank independence and conservatism in the presence of uncertain central bank preferences. We develop a model of endogenous monetary policy delegation in which government chooses the central bank's degree of inde-pendence and conservatism so as to minimise society's loss function. We find that the optimal combination between independence and conservatism is not necessarily characterised by substitutability. When uncertainty about the central bank's preferences is high, independence and conservatism can become complements. In this case, giving more independence to the central bank increases the need for conservatism.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2011/wp-cesifo-2011-02/cesifo1_wp3344.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3344.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3344

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Keywords: central bank independence; conservatism; transparency;

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References

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Citations

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Cited by:
  1. Marco M. Sorge, 2012. "Robust Delegation with Uncertain Monetary Policy Preferences," EERI Research Paper Series EERI_RP_2012_05, Economics and Econometrics Research Institute (EERI), Brussels.
  2. Carsten Hefeker & Blandine Zimmer, 2014. "Optimal Conservatism and Collective Monetary Policymaking under Uncertainty," CESifo Working Paper Series, CESifo Group Munich 4933, CESifo Group Munich.
  3. Meixing Dai & Qiao Zhang, 2013. "Central bank transparency with the cost channel," Working Papers of BETA 2013-06, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  4. Esteban Colla De Robertis & Last: Colla De Robertis, 2010. "Monetary Committee Size and Special Interest Influence," Documentos de Investigación - Research Papers, Centro de Estudios Monetarios Latinoamericanos, CEMLA 2, Centro de Estudios Monetarios Latinoamericanos, CEMLA.

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