Central Bank Independence and the `Free Lunch Puzzle': A New Perspective
AbstractA new perspective is provided on a puzzle that has emerged from the empirical lit- erature suggesting that government-independent central banks provide a `free lunch': lower in°ation is apparently achieved at no cost in terms of greater output variance. We assess the various explanations provided by the theoretical literature. After revis- iting the free lunch puzzle and con¯rming the empirical importance of open-economy effects, we develop a Rogoff-style delegation model that combines the latter with po- litical monetary cycle e®ects. We show that if all countries delegate monetary policy to government independent banks, as economies become more integrated then a low inflation, higher output variance trade-off re-emerges.
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Bibliographic InfoPaper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 0806.
Length: 31 pages
Date of creation: Mar 2006
Date of revision:
central bank independence; open economy; political uncertainty;
Find related papers by JEL classification:
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-04-02 (All new papers)
- NEP-FMK-2006-04-14 (Financial Markets)
- NEP-MAC-2006-04-04 (Macroeconomics)
- NEP-MON-2006-04-05 (Monetary Economics)
- NEP-POL-2006-04-04 (Positive Political Economics)
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