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The ultimate determinants of central bank independence

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Author Info

  • Eijffinger, S.C.W.
  • Schaling, E.

    (Tilburg University, Center for Economic Research)

Abstract

Using a graphical method, a new way of determining the optimal degree of central bank conservativeness is developed in this paper. Unlike Lohmann (1992) and Rogoff (1985), we are able to express the upper and lower bounds of the interval containing the optimal degree of conservativeness in terms of the structural parameters of the model. Next, we show that optimal central bank independence is higher, the higher the natural rate of unemployment, the greater the benefits of unanticipated inflation, the less inflation-averse society, and the smaller the variance of productivity shocks. These propositions are tested for nineteen industrial countries (Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, New Zealand, the Netherlands, Norway, Spain, Sweden, Switzerland, the United Kingdom and the United States) for the post-Bretton-Woods period (1960-1993). In testing the model we employ a latent variables method (LISREL) in order to distinguish between actual and optimal monetary regimes.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1995-5.

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Date of creation: 1995
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Handle: RePEc:dgr:kubcen:19955

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Web page: http://center.uvt.nl

Related research

Keywords: Central Banks; Monetary Policy; monetary economics;

References

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  1. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  2. Fischer, Stanley, 1977. "Wage indexation and macroeconomics stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 107-147, January.
  3. Taylor, John B., 1983. "`Rules, discretion and reputation in a model of monetary policy' by Robert J. Barro and David B. Gordon," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 123-125.
  4. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
  5. Eijffinger, S.C.W. & Schaling, E., 1993. "Central bank independence: Theory and evidence (Revised version)," Discussion Paper 1993-25, Tilburg University, Center for Economic Research.
  6. Eijffinger, S. & De Hann, J., 1995. "The Political Economy of Central Bank Independence," Papers 9587, Tilburg - Center for Economic Research.
  7. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  8. Eijffinger, S.C.W. & Keulen, M. van, 1995. "Central bank independence in another eleven countries," Open Access publications from Tilburg University urn:nbn:nl:ui:12-152914, Tilburg University.
  9. Carl E Walsh, 1993. "Optimal contracts for independent central bankers: private information, performance measures and reappointment," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  10. Manfred Neumann, 1991. "Precommitment by central bank independence," Open Economies Review, Springer, vol. 2(2), pages 95-112, June.
  11. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," Working papers 427, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  13. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May.
  14. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December.
  15. Eijffinger, S.C.W., 1993. "Central bank independence in twelve industrial countries," Open Access publications from Tilburg University urn:nbn:nl:ui:12-152908, Tilburg University.
  16. Alberto Alesina, 1988. "Macroeconomics and Politics," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 13-62 National Bureau of Economic Research, Inc.
  17. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
  18. Eijffinger, S.C.W. & Schaling, E., 1992. "Central bank independence: Criteria and indices," Research Memorandum 548, Tilburg University, Faculty of Economics and Business Administration.
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Citations

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Cited by:
  1. Andrew Hughes Hallett & Diana N. Weymark, 2005. "Independence Before Conservatism: Transparency, Politics and Central Bank Design," German Economic Review, Verein für Socialpolitik, vol. 6(1), pages 1-21, 02.
  2. Thomas Jordan, 2001. "Monetary control uncertainty and inflation bias," Journal of Economics, Springer, vol. 73(2), pages 125-147, June.
  3. Beetsma, R.M.W.J. & Bovenberg, A.L., 1995. "The Interaction of Fiscal and Monetary Policy in a Monetary Union: Balancing Credibility and Flexibility," DELTA Working Papers 95-24, DELTA (Ecole normale supérieure).
  4. Eijffinger, S.C.W. & Hoeberichts, M.M., 1998. "The trade off between central bank independence and conservativeness," Open Access publications from Tilburg University urn:nbn:nl:ui:12-76576, Tilburg University.
  5. Eijffinger, S.C.W. & Hoeberichts, M.M. & Schaling, E., 1995. "Optimal conservativeness in the Rogoff (1985) model: A graphical and closed-form solution," Discussion Paper 1995-121, Tilburg University, Center for Economic Research.
  6. Cukierman, A., 1996. "The Economics of Central Banking," Discussion Paper 1996-31, Tilburg University, Center for Economic Research.
  7. Hutchison, M M & Walsh, C E, 1998. "The Output-Inflation Tradeoff and Central Bank Reform: Evidence from New Zealand," Economic Journal, Royal Economic Society, vol. 108(448), pages 703-25, May.
  8. Baltensperger, Ernst & Fischer, Andreas M. & Jordan, Thomas J., 2007. "Strong goal independence and inflation targets," European Journal of Political Economy, Elsevier, vol. 23(1), pages 88-105, March.
  9. Aleksandra Maslowska, 2008. "Quest for the best: How to measure central bank independence and show its relation with inflation?," Discussion Papers 37, Aboa Centre for Economics.
  10. Beetsma,Roel M.W.J., 1996. "The Interaction of Fiscal and Monetary Policy in a Monetary Union: Balancing Credibility and Flexibility," Research Memorandum 005, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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