Central Banking as a Political Principal-Agent Problem
Due to their ties with elected leaders, central bankers may pursue policies that are not in society's best interests. Consequently, the relationship between the public and the central bank can be characterized as a principal-agent problem. An inflation and stabilization bias arise as a result of this agency problem and the magnitudes of these biases depend on the political environment. Various institutional proposals for eliminating these biases are examined and the authors find that central bank independence and performance contracts work best. However, they argue that central bank independence is preferable for resolving the agency problem. Copyright 1997 by Oxford University Press.
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Volume (Year): 35 (1997)
Issue (Month): 2 (April)
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