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Political Consensus, Uncertain Preferences, and Central Bank Independence

  • Muscatelli, V Anton

Models where monetary policy is delegated to an independent central bank using contracts or targets usually assume that the preferences of the principal and the agent are known with certainty. However, if there is no consensus in society about the relative costs of inflation and output stabilization, the delegation solution may not produce a better outcome for the median voter than discretion. This paper examines the robustness of the institutional solutions to the credibility problem with uncertain preferences. The author also examines the related issue of whether political parties have an interest in moving towards central bank independence. Copyright 1998 by Royal Economic Society.

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Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 50 (1998)
Issue (Month): 3 (July)
Pages: 412-30

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Handle: RePEc:oup:oxecpp:v:50:y:1998:i:3:p:412-30
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  1. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
  2. Clive Briault & Andrew Haldane & Mervyn King, 1996. "Independence and Accountability," Bank of England working papers 49, Bank of England.
  3. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-party System as a Repeated Game," Scholarly Articles 4552531, Harvard University Department of Economics.
  4. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May.
  5. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  6. Bennett T. McCallum, 1995. "Two Fallacies Concerning Central Bank Independence," NBER Working Papers 5075, National Bureau of Economic Research, Inc.
  7. Lars E.O. Svensson, 1995. "Optimal Inflation Targets, `Conservative' Central Banks, and Linear Inflation Contracts," NBER Working Papers 5251, National Bureau of Economic Research, Inc.
  8. Lossani, Marco & Natale, Piergiovanna & Tirelli, Patrizio, 1998. "Incomplete Information in Monetary Policy Games: Rules Rather Than a Conservative Central Banker," Scottish Journal of Political Economy, Scottish Economic Society, vol. 45(1), pages 33-47, February.
  9. Alesina, Alberto & Gatti, Roberta, 1995. "Independent Central Banks: Low Inflation at No Cost?," American Economic Review, American Economic Association, vol. 85(2), pages 196-200, May.
  10. Canzoneri, Matthew B & Nolan, Charles & Yates, Anthony, 1997. "Mechanisms for Achieving Monetary Stability: Inflation Targeting versus the ERM," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 46-60, February.
  11. Robert P. Flood & Peter Isard, 1989. "Monetary Policy Strategies," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 612-632, September.
  12. Michael D. Bordo & Finn E. Kydland, 1990. "The Gold Standard as a Rule," NBER Working Papers 3367, National Bureau of Economic Research, Inc.
  13. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  14. McCallum, Bennett T., 1997. "Crucial issues concerning central bank independence," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 99-112, June.
  15. Fregert, Klas & Jonung, Lars, 1996. "Inflation and Switches between Specie and Paper Standards in Sweden 1668-1931: A Public Finance Interpretation," Scottish Journal of Political Economy, Scottish Economic Society, vol. 43(4), pages 444-67, September.
  16. Muscatelli, Vito Antonio & Spinelli, Franco, 1996. "Gibson's Paradox and Policy Regimes: A Comparison of the Experience in the US, UK and Italy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 43(4), pages 468-92, September.
  17. Al-Nowaihi, A & Levine, Paul L, 1996. "Independent but Accountable: Walsh Contracts and the Credibility Problem," CEPR Discussion Papers 1387, C.E.P.R. Discussion Papers.
  18. Bordo Michael D. & Kydland Finn E., 1995. "The Gold Standard As a Rule: An Essay in Exploration," Explorations in Economic History, Elsevier, vol. 32(4), pages 423-464, October.
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  20. Charles Nolan & Eric Schaling, 1996. "Monetary Policy Uncertainty and Central Bank Accountability," Bank of England working papers 54, Bank of England.
  21. Waller, Christopher J., 1992. "A bargaining model of partisan appointments to the central bank," Journal of Monetary Economics, Elsevier, vol. 29(3), pages 411-428, June.
  22. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  23. Fratianni, Michele & von Hagen, J├╝rgen & Waller, Christopher, 1993. "Central Banking as a Political Principal-Agent Problem," CEPR Discussion Papers 752, C.E.P.R. Discussion Papers.
  24. Herrendorf, Berthold & Lockwood, Ben, 1996. "Rogoff's 'Conservative' Central Banker Restored," CEPR Discussion Papers 1386, C.E.P.R. Discussion Papers.
  25. Alesina, Alberto & Tabellini, Guido, 1988. "Credibility and politics," European Economic Review, Elsevier, vol. 32(2-3), pages 542-550, March.
  26. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December.
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