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A Political Agency Theory of Central Bank Independence

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  • Gauti B. Eggertsson
  • Eric Le Borgne

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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Bibliographic Info

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

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Length: 44
Date of creation: 01 Jul 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/144

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Related research

Keywords: Central bank role; Economic models; inflation; monetary policy; central bank; average inflation; independent central bank; nominal interest rate; lower inflation; inflation target; monetary policy decision; stable prices; inflation rate; monetary fund; low inflation; monetary regimes; inflation-targeting; intermediate monetary target; monetary stability; independent monetary policy; monetary policy regimes; monetary theory; real interest rate; monetary target; monetary policy decisions; real rate of interest; inflation targeting;

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References

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  1. Ben Lockwood & Eric Le Borgne, 2003. "Do Elections Always Motivate Incumbents? Experimentation vs. Career Concerns," IMF Working Papers 03/57, International Monetary Fund.
  2. Lockwood, Ben, 1997. "State-Contingent Inflation Contracts and Unemployment Persistence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 286-99, August.
  3. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  4. Godfrey Keller & Sven Rady, 1997. "Optimal Experimentation in a Changing Environment," STICERD - Theoretical Economics Paper Series /1997/333, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  5. Lippi, Francesco, 1998. " On Central Bank Independence and the Stability of Policy Targets," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(2), pages 495-512, June.
  6. Svensson, Lars E O, 1995. "Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts," CEPR Discussion Papers 1249, C.E.P.R. Discussion Papers.
  7. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  8. Muscatelli, Anton, 1998. "Optimal Inflation Contracts and Inflation Targets with Uncertain Central Bank Preferences: Accountability through Independence?," Economic Journal, Royal Economic Society, vol. 108(447), pages 529-42, March.
  9. Alesina, Alberto & Gatti, Roberta, 1995. "Independent Central Banks: Low Inflation at No Cost?," American Economic Review, American Economic Association, vol. 85(2), pages 196-200, May.
  10. Kenneth Rogoff, 1990. "Equilibrium Political Budget Cycles," NBER Working Papers 2428, National Bureau of Economic Research, Inc.
  11. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 195-225.
  12. John Ferejohn, 1986. "Incumbent performance and electoral control," Public Choice, Springer, vol. 50(1), pages 5-25, January.
  13. Schellekens, Philip, 2002. "Caution and Conservatism in the Making of Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 160-77, February.
  14. Fischer, Stanley, 1995. "Central-Bank Independence Revisited," American Economic Review, American Economic Association, vol. 85(2), pages 201-06, May.
  15. Waller, Christopher J & Walsh, Carl E, 1996. "Central-Bank Independence, Economic Behavior, and Optimal Term Lengths," American Economic Review, American Economic Association, vol. 86(5), pages 1139-53, December.
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Citations

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Cited by:
  1. Crowe, Christopher, 2008. "Goal independent central banks: Why politicians decide to delegate," European Journal of Political Economy, Elsevier, vol. 24(4), pages 748-762, December.
  2. Roseline Nyakerario Misati & Esman Morekwa Nyamongo & Lucas Kamau Njoroge & Sheila Kaminchia, 2012. "Feasibility of inflation targeting in an emerging market: evidence from Kenya," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 4(2), pages 146-159, June.
  3. Christopher W. Crowe, 2006. "Goal-Independent Central Banks," IMF Working Papers 06/256, International Monetary Fund.
  4. JoAnne Morris & Tonny Lybek, 2004. "Central Bank Governance," IMF Working Papers 04/226, International Monetary Fund.
  5. 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.
  6. Jan Libich, 2006. "An Explicit Inflation Target As A Commitment Device," CAMA Working Papers 2006-22, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  7. Libich, Jan & Stehlík, Petr, 2010. "Incorporating rigidity and commitment in the timing structure of macroeconomic games," Economic Modelling, Elsevier, vol. 27(3), pages 767-781, May.
  8. Blanes i Vidal, Jordi & Leaver, Clare, 2011. "Are tenured judges insulated from political pressure?," Journal of Public Economics, Elsevier, vol. 95(7), pages 570-586.

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