A Political Agency Theory of Central Bank Independence

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A Political Agency Theory of Central Bank Independence

Author Info

Eric Le Borgne
Gauti B. Eggertsson

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Gauti B. Eggertsson

Abstract

We propose a theory to explain why, and under what circumstances, a politician gives up rent and delegates policy tasks to an independent agency. We apply this theory to monetary policy by extending a standard dynamic "New-Keynesian" stochastic general equilibrium model. This model gives a new theory of central bank independence that is unrelated to the standard inflation bias problem. We derive several new predictions and show that they are consistent with the data. Finally, we show that while instrument independence of the central bank is desirable, goal independence is not.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/144.

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Length: 44 pages
Date of creation: 29 Jul 2003
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Handle: RePEc:imf:imfwpa:03/144

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References listed on IDEAS
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.:

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Other versions:
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Other versions:
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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.)

JoAnne Morris & Tonny Lybek, 2004. "Central Bank Governance: A Survey of Boards and Management," IMF Working Papers 04/226, International Monetary Fund. [Downloadable!]
Christopher W. Crowe, 2006. "Goal-Independent Central Banks: Why Politicians Decide to Delegate," IMF Working Papers 06/256, International Monetary Fund. [Downloadable!]
Jan Libich & Andrew Hughes Hallett & Petr Stehlik, 2007. "Monetary And Fiscal Policy Interaction With Various Degrees And Types Of Commitment," CAMA Working Papers 2007-21, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
Other versions:
- Hughes Hallett, Andrew & Libich, Jan & Stehlík, Petr, 2007. "Monetary and Fiscal Policy Interaction with Various Degrees and Types of Commitment," CEPR Discussion Papers 6586, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Gauti Eggertsson & Eric Le Borgne, 2005. "The politics of central bank independence: a theory of pandering and learning in government," Staff Reports 205, Federal Reserve Bank of New York. [Downloadable!]
Jan Libich, 2006. "An Explicit Inflation Target As A Commitment Device," CAMA Working Papers 2006-22, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
Other versions:
- Libich, Jan, 2008. "An explicit inflation target as a commitment device," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 43-68, March. [Downloadable!] (restricted)

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