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Central Banking as a Political Principal-Agent Problem

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  • Fratianni, Michele
  • von Hagen, Jurgen
  • Waller, Christopher J

Abstract

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.

Suggested Citation

  • Fratianni, Michele & von Hagen, Jurgen & Waller, Christopher J, 1997. "Central Banking as a Political Principal-Agent Problem," Economic Inquiry, Western Economic Association International, vol. 35(2), pages 378-393, April.
    • Handle: RePEc:oup:ecinqu:v:35:y:1997:i:2:p:378-93
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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