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Central bank design in general equilibrium

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Author Info
James Bullard
Christopher J. Waller

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Abstract

We study the effects of alternative institutional arrangements for the determination of monetary policy in the context of a capital-theoretic, general equilibrium economy. In the absence of an institutional arrangement, there is a continuum of steady state equilibria indexed by rates of inflation ranging from the Friedman rule to high a high level. The social optimum is associated with the Friedman rule.. We consider three institutional arrangements for determining monetary policy. The first, unconditional majority voting, always leads to a substantial inflation bias. The second, a simple form of bargaining which we interpret as a policy board, generally improves on the unconditional majority voting outcome. Finally, we consider a form of constitutional rule which always achieves the social optimum.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1998-002.

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Date of creation: 2002
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Publication status: Published in Journal of Money, Credit, and Banking, February 2004, 36(1), pp. 95-113
Handle: RePEc:fip:fedlwp:1998-002

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Keywords: Monetary theory ; Banks and banking; Central;

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References listed on IDEAS
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  1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121. [Downloadable!] (restricted)
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  2. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
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  3. Jon Faust, 1992. "Whom can we trust to run the Fed? Theoretical support for the founders' views," International Finance Discussion Papers 429, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  4. Faust, Jon, 1996. "Whom can we trust to run the Fed? Theoretical support for the founders' views," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 267-283, April. [Downloadable!] (restricted)
  5. Waller, Christopher J, 1989. "Monetary Policy Games and Central Bank Politics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(4), pages 422-31, November. [Downloadable!] (restricted)
  6. Chari, V. V. & Christiano, Lawrence J. & Eichenbaum, Martin, 1998. "Expectation Traps and Discretion," Journal of Economic Theory, Elsevier, vol. 81(2), pages 462-492, August. [Downloadable!] (restricted)
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  7. Ireland, Peter N., 1997. "Sustainable monetary policies," Journal of Economic Dynamics and Control, Elsevier, vol. 22(1), pages 87-108, November. [Downloadable!] (restricted)
  8. 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. [Downloadable!] (restricted)
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  9. Costas Azariadis & Vincenzo Galasso, 1996. "Discretion, rules and volatility," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 65-74. [Downloadable!]
  10. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November. [Downloadable!] (restricted)
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  11. Obstfeld, Maurice, 1991. "Dynamic Seigniorage Theory: An Exploration," CEPR Discussion Papers 519, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  12. Waller, Christopher J., 1992. "A bargaining model of partisan appointments to the central bank," Journal of Monetary Economics, Elsevier, vol. 29(3), pages 411-428, June. [Downloadable!] (restricted)
  13. Chari, V V & Kehoe, Patrick J, 1990. "Sustainable Plans," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 783-802, August. [Downloadable!] (restricted)
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  14. Michele Boldrin & Aldo Rustichini, 2000. "Political Equilibria with Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 41-78, January. [Downloadable!] (restricted)
  15. Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 7-29, January. [Downloadable!] (restricted)
  16. Peter N. Ireland, 1998. "Expectations, credibility, and time-consistent monetary policy," Working Paper 9812, Federal Reserve Bank of Cleveland. [Downloadable!]
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  17. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June. [Downloadable!] (restricted)
  18. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March. [Downloadable!] (restricted)
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  19. Christopher J. Waller, 2000. "Policy Boards And Policy Smoothing," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 305-339, February. [Downloadable!] (restricted)
  20. Loewy, Michael B., 1988. "Equilibrium policy in an overlapping generations economy," Journal of Monetary Economics, Elsevier, vol. 22(3), pages 485-499. [Downloadable!] (restricted)
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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. Christopher Waller, 2002. "Modeling monetary economies Bruce Champ and Scott Freeman, 2001, pp. 325," Atlantic Economic Journal, International Atlantic Economic Society, vol. 30(2), pages 213-217, June. [Downloadable!] (restricted)
  2. Helge Berger & Till Mueller, 2007. "How should large and small countries be represented in a currency union?," Public Choice, Springer, vol. 132(3), pages 471-484, September. [Downloadable!] (restricted)
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  3. Bhattacharya, Joydeep & Bunzel, Helle & Haslag, J., 2003. "The Non-Monotonic Relationship Between Seigniorage and Inequality," Staff General Research Papers 10252, Iowa State University, Department of Economics.
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  4. Aleksander Berentsen & Carlo Strub, 2008. "Central Bank Design with Heterogeneous Agents," IEW - Working Papers iewwp365, Institute for Empirical Research in Economics - IEW. [Downloadable!]
    Other versions:
  5. Helge Berger, 2006. "Optimal Central Bank Design: Benchmarks for the ECB," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  6. Berthold Herrendorf & Manfred J.M. Neumann, 2003. "The Political Economy of Inflation, Labour Market Distortions and Central Bank Independence," Economic Journal, Royal Economic Society, vol. 113(484), pages 43-64, January. [Downloadable!] (restricted)
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