This paper demonstrates that failures in monetary policy arise not just from dynamic inconsistency, but more importantly, from imperfect understanding of the economy and the effects of policy. Using recent and historic episodes from the United States and abroad, we show that limited knowledge on the part of economists, policymakers, elected leaders, and voters has been an important source of monetary policy mistakes. We then analyze what institutions of monetary policy could address the problems of both dynamic inconsistency and limited knowledge. Our analysis suggests that one set of institutions that could do this is a highly independent central bank with discretion about both the goals and the conduct of policy, combined with a two-level structure where elected leaders appoint a board of trustees for the central bank, which in turn selects the actual policymakers. We conclude by discussing recent and proposed reforms in monetary policy and institutions in industrialized countries in light of this analysis.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
5557.
Length: Date of creation: Aug 1997 Date of revision: Publication status: published relationship to a non-chapter. This should not happen. Please contact NBER. Handle: RePEc:nbr:nberwo:5557
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Chapter
Christina D. Romer & David H. Romer, 1997.
"Institutions for Monetary Stability,"
NBER Chapters,
in: Reducing Inflation: Motivation and Strategy, pages 307-334
National Bureau of Economic Research, Inc.
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Find related papers by JEL classification: E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
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.:
Alberto Alesina, 1988.
"Macroeconomics and Politics,"
NBER Chapters,
in: NBER Macroeconomics Annual 1988, Volume 3, pages 13-62
National Bureau of Economic Research, Inc.
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