Partisan and Electoral Motivations and the Choice of Monetary Institutions Under Fully Mobile Capital
According to the time-inconsistency literature in monetary economics,even a benevolent social planner has an incentive to announce, and thenrenege on, a commitment to a low-in ation policy, because an inationary surprise can result in an increase in national income.Marketactors, however, should see through this plan and form in ationaryexpectations that will make surprise unlikely. As a result, in ation,but not income, should be higher under a discretionary regime than undera regime where credible commitments are possible. As the editors ofthis volume point out, central bank independence and xed exchangerates have both been put forward as solutions to the benevolent socialplanner s problem.2 If central bank independence and xed exchangerates are effective institutional xes for the timeinconsistencyproblem in monetary policy, it is easy to see why they would be adopted.
Volume (Year): 56 (2002)
Issue (Month): 04 (September)
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