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A Deliberative Independent Central Bank

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  • Schürz, Martin

    ()
    (Oesterreichische Nationalbank, Economic Analysis Division)

  • Jericha, Erwin

    ()
    (Vienna University of Technology)

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    Abstract

    The paper develops a communication game that is applied to the question of central bank policy and independence. The game is about the preferred degree of conservatism of monetary policy and the game setting consists of a principal (politics), an agent (central bank) and an observer (financial market participants). The extent of the welfare losses depends on the degree of knowledge, the endogenized signaling of financial market participants and the probability whether the degree of conservatism in monetary policy is adequate to nature. Consequently, a mechanism to minimize welfare losses of the principal has to be implemented. It is shown how the introduction of an institutional control mechanism with a countervailing goal function will improve the utilities for the principal.

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    Bibliographic Info

    Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 133.

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    Date of creation: 06 Nov 2006
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    Handle: RePEc:onb:oenbwp:133

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    Keywords: accountability; agency losses; principal agent model;

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    References

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    1. Soskice, David & Iversen, Torben, 1998. "Multiple Wage-Bargaining Systems in the Single European Currency Area," Oxford Review of Economic Policy, Oxford University Press, vol. 14(3), pages 110-24, Autumn.
    2. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
    3. W.H. Buiter, 1999. "Alice in Euroland," CEP Discussion Papers dp0423, Centre for Economic Performance, LSE.
    4. Andrew Hughes Hallett & Peter Mooslechner, 1999. "Challenges for Economic Policy Coordination within European Monetary Union," Empirica, Springer, vol. 26(3), pages 169-170, September.
    5. Robert J. Barro & David B. Gordon, 1983. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
    6. Stanley Fischer, 1995. "Modern Approaches to Central Banking," NBER Working Papers 5064, National Bureau of Economic Research, Inc.
    7. Alan S. Blinder, 1996. "Central banking in a democracy," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-14.
    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. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, January.
    10. Adam S. Posen, 1995. "Declarations Are Not Enough: Financial Sector Sources of Central Bank Independence," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 253-274 National Bureau of Economic Research, Inc.
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