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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. Jensen, Henrik, 2001. "Optimal Degrees of Transparency in Monetary Policymaking," CEPR Discussion Papers 2689, C.E.P.R. Discussion Papers.
  2. Levine, Paul L & Pearlman, Joseph, 1998. "Monetary Union: The Ins and Outs of Strategic Delegation," CEPR Discussion Papers 1800, C.E.P.R. Discussion Papers.
  3. 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.
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  8. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
  9. Marco Catenaro & Patrizio Tirelli, 2000. "Reconsidering The Pros and Cons of Fiscal Policy Co-ordination in a Monetary Union: Should We Set Public Expenditure Targets ?," School of Economics Discussion Papers 0002, School of Economics, University of Surrey.
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  15. Castrén, Olli, 1999. "Accountability of the ECB and a Government's Incentives to Rebel against the Common Monetary Policy in EMU," Research Discussion Papers 2/1999, Bank of Finland.
  16. Cukierman, A., 2000. "Accountability, Credibility, Transparency and Stabilization Policy in the Eurosystem," Papers 2000-4, Tel Aviv.
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  19. repec:fth:bfsefi:2/99 is not listed on IDEAS
  20. Beetsma, R.M.W.J. & Bovenberg, A.L., 1995. "Designing fiscal and monetary institutions in a second-best world," Discussion Paper 1995-47, Tilburg University, Center for Economic Research.
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  22. 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.
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  24. Cukierman, Alex, 1994. "Central Bank Independence and Monetary Control," Economic Journal, Royal Economic Society, vol. 104(427), pages 1437-48, November.
  25. Xavier Debrun, 2000. "Fiscal Rules in a Monetary Union: A Short-Run Analysis," Open Economies Review, Springer, vol. 11(4), pages 323-358, October.
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  27. Schaling, E. & Hoeberichts, M.M. & Eijffinger, S.C.W., 1998. "Incentive Contracts for Central Bankers under Uncertainty: Walsh-Svensson Non-Equivalence Revisited," Discussion Paper 1998-11, Tilburg University, Center for Economic Research.
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Citations

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

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