Accountability of the ECB and a Government's Incentives to Rebel Against the Common Monetary Policy in EMU

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Accountability of the ECB and a Government's Incentives to Rebel Against the Common Monetary Policy in EMU

Author Info

Castren, O.

Abstract

This paper considers how the "true" common monetary policy that is conducted by the ECB under various sources of uncertainty will differ from the policy that was agreed in the Maastricht Treaty, and how the uncertainties may induce a representative government to criticise the common monetary policy. Acquiring information about the transmission mechanism, and revealing that information as well as information about the ECB reaction function, is incentive compatible for the ECB both directly and indirectly. The direct effect means that the ECB's own welfare is decreasing in uncertainties. The indirect effect arises because less uncertainty reduces the risk of criticism from the individual governments' side. The risk of criticism is the larger, and consequently the indirect incentive to reduce uncertainty is the higher, the larger are the leftward shifts in national political preferences from those that prevailed when the Maastricht Treaty was signed. The model also provides an explanation for the ECB's choice of monetary policy strategy that incorporates elements of both monetary targeting and inflation targeting.

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Publisher Info
Paper provided by Bank of Finland. Research Department. in its series Bank of Finland - Studies in Economics and Finance with number 2/99.

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Length: 20 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:fth:bfsefi:2/99

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Postal: Bank of Finland. Research Department. P.O. Box 160, FIN-00101, Helsinki, Finland.
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Related research
Keywords: MONETARY POLICY;

Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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Francesca Castellani, 2001. "Central Bank Independence and Accountability Under Complete Information," HEI Working Papers 05-2001, Economics Section, The Graduate Institute of International Studies. [Downloadable!]

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