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Central Bank Independence and Accountability Under Complete Information

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  • Francesca Castellani

    ()
    (IUHEI)

Abstract

This paper investigates the accountability of the independent monetary authority in the case of strategic interaction between the delegating authority (government) and the agent (central bank) in the policy game with complete information. As the unelected monetary authority is not the by-product of society's preferences, delegation turns out to be socially costly. Two main results emerge from the model. First, a monetary stance biased towards price stability makes the optimal fiscal strategy time-inconsistent, destroys the credibility of the mandate to deliver the socially optimum inflation rate and prevents the monetary authority from being held accountable for achieving it. Hence, delegation results ill-designed to make the monetary authority both independent and accountable. To this end, specific policy coordination mechanisms may have to be imposed on the fiscal authority to complement the delegation mechanism. Second, in the case where the government can precommit on fiscal strategies, no fiscal arrangement is ineeded and strict inflation targeting allows the central bank to be accountable.

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Bibliographic Info

Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 05-2001.

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Length: 30
Date of creation: 10 Oct 2001
Date of revision:
Handle: RePEc:gii:giihei:heiwp05-2001

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Keywords: central bank accountability; inflation targeting; fiscal restraints;

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References

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  1. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
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Citations

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Cited by:
  1. Katrin Ullrich, 2007. "Introducing Instruments of Central Bank Accountability in a Monetary Union," Open Economies Review, Springer, vol. 18(3), pages 239-262, July.
  2. Ullrich, Katrin, 2003. "Unabhängigkeit und Verantwortlichkeit der Europäischen Zentralbank," ZEW Discussion Papers 03-65, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Francesca Castellani & Xavier Debrun, 2001. "Central Bank Independence and the Design of Fiscal Institutions," IMF Working Papers 01/205, International Monetary Fund.

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