An Interest-Group Theory of Central Bank Independence
This article presents an interest-group theory of central bank independence. In the absence of an independent central bank, politicians can benefit in the short run by creating an unanticipated burst of inflation that unravels many interest-group deals. Interest groups then have to return to the politicians to renegotiate the deals, and the politician can extract a portion of the rents as a price for renegotiation. However, while politicians can benefit from creating unanticipated inflation, they benefit even more by credibly precommitting not to inflate the currency ex post. If they do not inflate the currency ex post, they can obtain more in payments for their services ex ante because the interest groups that are paying for the deal will not discount their upfront compensation by the risk that the deal will lack durability owing to future inflation. The independent central bank provides a mechanism for reliably precommitting not to engage in inflationary actions designed to extract future rents. Copyright 1998 by the University of Chicago.
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