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Commitment Rather Than Independence: An Institutional Design for Reducing the Inflationary Bias of Monetary Policy

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  • Prast, Henriette M

Abstract

This paper distinguishes between central bank independence and central bank commitment. Independent central banks are free to choose their policy goals and instruments, whereas committed central banks are limited in their behavior with the goal of price stability. It is argued that for political and economic reasons commitment is to be preferred over independence. For sixteen industrial countries, the central banks are ranked according to their degree of central bank independence and to their degree of commitment. The empirical evidence does not indicate a significant relationship between independence, whereas a commitment strategy, which does not require institutional changes, lowers inflation without affecting output. Copyright 1996 by WWZ and Helbing & Lichtenhahn Verlag AG

Suggested Citation

  • Prast, Henriette M, 1996. "Commitment Rather Than Independence: An Institutional Design for Reducing the Inflationary Bias of Monetary Policy," Kyklos, Wiley Blackwell, vol. 49(3), pages 377-405.
  • Handle: RePEc:bla:kyklos:v:49:y:1996:i:3:p:377-405
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    1. repec:oxf:wpaper:23 is not listed on IDEAS
    2. H.M. Prast, 1996. "Inflation, unemployment and the position of the central bank: the opinion of the public," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 49(199), pages 415-454.
    3. H.M. Prast, 1996. "Inflation, unemployment and the position of the central bank: the opinion of the public," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 49(199), pages 415-454.
    4. H. Prast, 1998. "Inflation, distortionary taxation and the design of monetary policy: the role of social cohesion," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 51(204), pages 37-53.
    5. Cem Mehmet Baydur & Bora Suslu & Selahattin Bekmez, 2004. "The independence of central bank in view of Rogoff: The Turkish experience," European Research Studies Journal, European Research Studies Journal, vol. 0(1-2), pages 143-143.
    6. Andreas Freytag, 2001. "Does central bank independence reflect monetary commitment properly? Methodical considerations," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 54(217), pages 181-208.
    7. James Forder, 2002. "Interests and 'Independence': The European Central Bank and the theory of bureaucracy," International Review of Applied Economics, Taylor & Francis Journals, vol. 16(1), pages 51-69.
    8. H. Prast, 1998. "Inflation, distortionary taxation and the design of monetary policy: the role of social cohesion," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 51(204), pages 37-53.

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