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Independence Before Conservatism: Transparency, Politics and Central Bank Design

Author

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  • Hallett Andrew Hughes

    (Vanderbilt University, Nashville,Tennessee, United States of America)

  • Weymark Diana N.

    (Vanderbilt University, Nashville,Tennessee, United States of America)

Abstract

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.

Suggested Citation

  • Hallett Andrew Hughes & Weymark Diana N., 2005. "Independence Before Conservatism: Transparency, Politics and Central Bank Design," German Economic Review, De Gruyter, vol. 6(1), pages 1-21, February.
    • Handle: RePEc:bpj:germec:v:6:y:2005:i:1:p:1-21
    DOI: 10.1111/j.1465-6485.2005.00119.x
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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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