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The trade-off between central bank independence and conservatism in a New Keynesian framework

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  • Eijffinger, Sylvester C.W.
  • Hoeberichts, Macro M.

Abstract

The purpose of this paper is to discuss the issue of Treaty reform and its consequences for monetary policy. Inter alia, the changes include that the institutional set-up will be subtly changed and the European Central Bank (ECB) will be grouped in the first part of the Treaty as one of the "other institutions and advisory bodies". Possibly more importantly, the euro area as such will be in the position to act legally as itself within the European Union (EU) legal structures. The Eurogroup also will be officially recognized ("Euro-Ecofin-Council"). President Jean-Claude Trichet's concern about the status of the ECB under the new Treaty and fear that by including the bank in a list of EU institutions implies a risk that EU member states could formulate policy recommendations to the ECB, but may also lead to more central bank conservatism with the ECB as explained in our analysis. In this paper we analyze the trade-off between central bank independence and conservatism with New Keynesian framework following Woodford [Woodford, M., 2003. Interest and prices: foundations of a theory of monetary policy. Princeton University Press, Princeton.] and others. Our conclusion is that the trade-off between central bank independence and conservatism still holds within the New Keynesian framework. Politicians should therefore realize that their attempts to downgrade ECB's independence legally and verbally will only increase its conservatism in order to maintain the same inflationary bias and limit the ECB's degrees of freedom with respect to its interest rate policy.

Suggested Citation

  • Eijffinger, Sylvester C.W. & Hoeberichts, Macro M., 2008. "The trade-off between central bank independence and conservatism in a New Keynesian framework," European Journal of Political Economy, Elsevier, vol. 24(4), pages 742-747, December.
  • Handle: RePEc:eee:poleco:v:24:y:2008:i:4:p:742-747
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    References listed on IDEAS

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    1. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
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    5. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: II. Applications," NBER Working Papers 9420, National Bureau of Economic Research, Inc.
    6. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, January.
    7. Eijffinger, Sylvester C W & Hoeberichts, Marco, 1998. "The Trade off between Central Bank Independence and Conservativeness," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 397-411, July.
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    Cited by:

    1. 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.
    2. Rodriguez, Cesar M., 2016. "Economic and political determinants of exchange rate regimes: The case of Latin America," International Economics, Elsevier, vol. 147(C), pages 1-26.
    3. de Haan, J. & Eijffinger, Sylvester, 2016. "The Politics of Central Bank Independence," Discussion Paper 2016-047, Tilburg University, Center for Economic Research.
    4. Belke, Ansgar & Potrafke, Niklas, 2012. "Does government ideology matter in monetary policy? A panel data analysis for OECD countries," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1126-1139.
    5. repec:eee:riibaf:v:42:y:2017:i:c:p:855-864 is not listed on IDEAS
    6. Dimakou, Ourania, 2015. "Bureaucratic corruption and the dynamic interaction between monetary and fiscal policy," European Journal of Political Economy, Elsevier, vol. 40(PA), pages 57-78.
    7. repec:zbw:rwirep:0094 is not listed on IDEAS
    8. Cavoli, Tony & Wilson, John K., 2015. "Corruption, central bank (in)dependence and optimal monetary policy in a simple model," Journal of Policy Modeling, Elsevier, vol. 37(3), pages 501-509.
    9. Dimakou, Ourania, 2013. "Monetary and fiscal institutional designs," Journal of Comparative Economics, Elsevier, vol. 41(4), pages 1141-1166.
    10. Berger, Wolfram & Kißmer, Friedrich, 2013. "Central bank independence and financial stability: A tale of perfect harmony?," European Journal of Political Economy, Elsevier, vol. 31(C), pages 109-118.
    11. Esteban Colla De Robertis, 2010. "Monetary Committee Size and Special Interest Influence," Documentos de Investigación - Research Papers 2, Centro de Estudios Monetarios Latinoamericanos, CEMLA.
    12. Berdiev, Aziz N. & Kim, Yoonbai & Chang, Chun Ping, 2012. "The political economy of exchange rate regimes in developed and developing countries," European Journal of Political Economy, Elsevier, vol. 28(1), pages 38-53.
    13. Papadamou, Stephanos & Sidiropoulos, Moïse & Spyromitros, Eleftherios, 2017. "Does central bank independence affect stock market volatility?," Research in International Business and Finance, Elsevier, pages 855-864.
    14. Ansgar Belke & Niklas Potrafke, 2009. "Does Government Ideology Matter in Monetary Policy? – A Panel Data Analysis for OECD Countries," Ruhr Economic Papers 0094, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.

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