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The optimal choice of central bank independence and conservatism under uncertainty

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  • Hefeker, Carsten
  • Zimmer, Blandine

Abstract

This paper examines the optimal monetary delegation arrangement of central bank independence and conservatism in the presence of uncertainty about the central bank’s output objective. We show that full independence is no longer optimal with uncertain central bank preferences, and that optimal delegation involves the choice of both independence and conservatism. Further, we find that the usual trade-off between independence and conservatism no longer necessarily holds. Consequently, high central bank independence may also require a high level of conservatism.

Suggested Citation

  • Hefeker, Carsten & Zimmer, Blandine, 2011. "The optimal choice of central bank independence and conservatism under uncertainty," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 595-606.
  • Handle: RePEc:eee:jmacro:v:33:y:2011:i:4:p:595-606
    DOI: 10.1016/j.jmacro.2011.09.005
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    References listed on IDEAS

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    1. repec:bla:intfin:v:20:y:2017:i:2:p:189-209 is not listed on IDEAS
    2. Masciandaro, Donato & Romelli, Davide, 2015. "Ups and downs of central bank independence from the Great Inflation to the Great Recession: theory, institutions and empirics," Financial History Review, Cambridge University Press, vol. 22(03), pages 259-289, December.
    3. Dalla Pellegrina, L. & Masciandaro, D. & Pansini, R.V., 2013. "The central banker as prudential supervisor: Does independence matter?," Journal of Financial Stability, Elsevier, vol. 9(3), pages 415-427.
    4. Sorge, Marco M., 2013. "Robust delegation with uncertain monetary policy preferences," Economic Modelling, Elsevier, vol. 30(C), pages 73-78.
    5. Donato Masciandaro & Davide Romelli, 2015. "Ups and Downs. Central Bank Independence from the Great Inflation to the Great Recession: Theory, Institutions and Empirics," BAFFI CAREFIN Working Papers 1503, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    6. Olga S. Kuznetsova & Sergey A. Merzlyakov, 2015. "The Role of Uncertain Government Preferences For Fiscal and Monetary Policy Interaction," HSE Working papers WP BRP 102/EC/2015, National Research University Higher School of Economics.
    7. Jakob de Haan & Sylvester Eijffinger, 2016. "The politics of central bank independence," DNB Working Papers 539, Netherlands Central Bank, Research Department.
    8. repec:mbr:jmonec:v:11:y:2016:i:1:p:15-30 is not listed on IDEAS
    9. Meixing Dai & Qiao Zhang, 2013. "Central bank transparency with the cost channel," Working Papers of BETA 2013-06, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

    More about this item

    Keywords

    Central bank independence; Conservatism; Transparency;

    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • E - Macroeconomics and Monetary Economics

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