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Independence Before Conservatism: Transparency, Politics and Central Bank Design

  • Andrew Hughes Hallett
  • Diana N. Weymark

The problem of monetary policy delegation is formulated as a two-stage game between the government and the central bank. In the first stage the government chooses the institutional design of the central bank. Monetary and fiscal policy are implemented in the second stage. When fiscal policy is taken into account, there is a continuum of combinations of central bank independence and conservatism that produce optimal outcomes. This indeterminacy is resolved by appealing to practical considerations. In particular, it is argued that full central bank independence facilitates the greatest degree of policy transparency and political coherence. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd. 2005.

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Article provided by Verein für Socialpolitik in its journal German Economic Review.

Volume (Year): 6 (2005)
Issue (Month): 1 (02)
Pages: 1-21

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Handle: RePEc:bla:germec:v:6:y:2005:i:1:p:1-21
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  1. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
  2. Faust, Jon & Svensson, Lars E O, 1998. "Transparency and Credibility: Monetary Policy with Unobservable Goals," CEPR Discussion Papers 1852, C.E.P.R. Discussion Papers.
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  11. 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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  17. Demertzis, Maria & Hughes Hallett, Andrew & Viegi, Nicola, 2004. "An independent central bank faced with elected governments," European Journal of Political Economy, Elsevier, vol. 20(4), pages 907-922, November.
  18. Dave Turner & Elena Seghezza, 1999. "Testing for a Common OECD Phillips Curve," OECD Economics Department Working Papers 219, OECD Publishing.
  19. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, June.
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