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Independence before Conservatism: Transparency, Politics and Central Bank Design

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Author Info
Hughes Hallett, Andrew
Weymark, Diana

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Abstract

The problem of monetary policy delegation is formulated as a two-stage game between the government and the central bank. In the first stage the government chooses the institutional design of the central bank. Monetary and fiscal policy are implemented in the second stage. When fiscal policy is taken into account, there is a continuum of combinations of central bank independence and conservatism that produce optimal outcomes. This indeterminacy is resolved by appealing to practical considerations. In particular, it is argued that full central bank independence facilitates the greatest degree of policy transparency and political coherence.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3336.

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Date of creation: Apr 2002
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Handle: RePEc:cpr:ceprdp:3336

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Related research
Keywords: central bank conservatism; central bank independence; credibility; flexible response; monetary policy delegation; policy coherence; transparency;

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Jon Faust & Lars E.O. Svensson, 1998. "Transparency and credibility: monetary policy with unobservable goals," International Finance Discussion Papers 605, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  2. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  3. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March. [Downloadable!] (restricted)
  4. Dave Turner & Elena Seghezza, 1999. "Testing for a Common OECD Phillips Curve," OECD Economics Department Working Papers 219, OECD, Economics Department. [Downloadable!]
  5. Eijffinger, Sylvester C W & Hoeberichts, Marco, 1998. "The Trade off between Central Bank Independence and Conservativeness," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 397-411, July.
    Other versions:
  6. Dixit, Avinash, 2000. "A Repeated Game Model of Monetary Union," Economic Journal, Royal Economic Society, vol. 110(466), pages 759-80, October. [Downloadable!] (restricted)
  7. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Working Papers in Applied Economic Theory 94-05, Federal Reserve Bank of San Francisco.
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  8. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April. [Downloadable!] (restricted)
  9. Dixit, Avinash, 2001. "Games of monetary and fiscal interactions in the EMU," European Economic Review, Elsevier, vol. 45(4-6), pages 589-613, May. [Downloadable!] (restricted)
  10. Eijffinger, S. & Schaling, E., 1995. "The Ultimate Determinants of Central Bank Independence," Discussion Paper 5, Tilburg University, Center for Economic Research. [Downloadable!]
  11. Alesina, Alberto & Gatti, Roberta, 1995. "Independent Central Banks: Low Inflation at No Cost?," American Economic Review, American Economic Association, vol. 85(2), pages 196-200, May. [Downloadable!] (restricted)
  12. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March. [Downloadable!] (restricted)
  13. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608.
  14. Alesina, Alberto & Tabellini, Guido, 1987. "Rules and Discretion with Noncoordinated Monetary and Fiscal Policies," Economic Inquiry, Oxford University Press, vol. 25(4), pages 619-30, October.
  15. Fischer, Stanley, 1995. "Central-Bank Independence Revisited," American Economic Review, American Economic Association, vol. 85(2), pages 201-06, May.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Andrew Hughes Hallett, 2008. "Sustainable fiscal policies and budgetary risk under alternative monetary policy arrangements," Economic Change and Restructuring, Springer, vol. 41(1), pages 1-28, March. [Downloadable!] (restricted)
  2. Andrew Hughes Hallett & Jan Libich, 2007. "Fiscal-monetary Interactions: The Effect of Fiscal Restraint and Public Monitoring on Central Bank Credibility," Open Economies Review, Springer, vol. 18(5), pages 559-576, November. [Downloadable!] (restricted)
  3. Hughes Hallett, Andrew, 2005. "In Praise of Fiscal Restraint and Debt Rules. What the Euro Zone Might Do Now," CEPR Discussion Papers 5043, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Andrew Hallett & Nicola Viegi, 2002. "Inflation Targeting as a Coordination Device," Open Economies Review, Springer, vol. 13(4), pages 341-362, October. [Downloadable!] (restricted)
  5. Andrew Hughes Hallett & Diana N. Weymark, 2002. "Government Leadership and Central Bank Design," Working Papers 0208, Department of Economics, Vanderbilt University, revised Dec 2004. [Downloadable!]
    Other versions:
  6. Andrew Hughes Hallett, 2004. "Post-Thatcher Fiscal Strategies in the U.K.: An Interpretation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  7. Stephen M. Miller & Huiping Yuan, 2009. "Consistent Targets and Optimal Monetary Policy: Conservative Central Banker Redux," Working Papers 0908, University of Nevada, Las Vegas , Department of Economics. [Downloadable!]
    Other versions:
  8. Jan Libich & Andrew Hughes Hallett & Petr Stehlik, 2007. "Monetary And Fiscal Policy Interaction With Various Degrees And Types Of Commitment," CAMA Working Papers 2007-21, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
    Other versions:
  9. Huiping Yuan & Stephen M. Miller & Langnan Chen, 2009. "The Making of Optimal and Consistent Policy: An Analytical Framework for Monetary Models," Working Papers 0909, University of Nevada, Las Vegas , Department of Economics. [Downloadable!]
    Other versions:
  10. Huiping Yuan & Stephen M. Miller, 2009. "Implementing Optimal Monetary Policy: Objectives and Rules," Working Papers 0911, University of Nevada, Las Vegas , Department of Economics. [Downloadable!]
  11. Ali al-Nowaihi & Paul Levine & Alex Mandilaras, 2006. "Central Bank Independence and the `Free Lunch Puzzle': A New Perspective," Department of Economics Discussion Papers 0806, Department of Economics, University of Surrey. [Downloadable!]
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