IDEAS home Printed from https://ideas.repec.org/h/spr/sprchp/978-0-387-75870-1_24.html
   My bibliography  Save this book chapter

The Political Economy of Monetary Policy Conduct and Central Bank Design

In: Readings in Public Choice and Constitutional Political Economy

Author

Listed:
  • Manfred Gärtner

Abstract

There are few areas in which public choice has had as much success in making inroads into mainstream economics and, in particular, in influencing real-life developments as in the design of monetary institutions and the day-to-day conduct of monetary policy. This survey tracks these developments, from the humble beginnings in the 1970s related to Nordhaus’ (1975) account of the opportunistic political business cycle to the widespread academic and political discussion on monetary policy rules and targets of today.2 The next section contains a compact review of the two classical ideas in political macroeconomics, the political business cycle and the inflation bias. We then move on to more modern stochastic models, in which the desire for undistorted stabilization of supply shocks calls for refined remedies to the time-inconsistency problem, such as performance contracts and inflation targets for central banks. The following section moves on to a discussion of current developments that focus on instrument and targeting rules for monetary policy. Finally, we briefly assess these developments.

Suggested Citation

  • Manfred Gärtner, 2008. "The Political Economy of Monetary Policy Conduct and Central Bank Design," Springer Books, in: Readings in Public Choice and Constitutional Political Economy, chapter 24, pages 423-446, Springer.
  • Handle: RePEc:spr:sprchp:978-0-387-75870-1_24
    DOI: 10.1007/978-0-387-75870-1_24
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Gartner, Manfred, 2000. "Political Macroeconomics: A Survey of Recent Developments," Journal of Economic Surveys, Wiley Blackwell, vol. 14(5), pages 527-561, December.
    2. 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.
    3. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March.
    4. 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.
    5. Hibbs, Douglas A., 1977. "Political Parties and Macroeconomic Policy," American Political Science Review, Cambridge University Press, vol. 71(4), pages 1467-1487, December.
    6. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1295-1328.
    7. Ball, Laurence & Gregory Mankiw, N. & Reis, Ricardo, 2005. "Monetary policy for inattentive economies," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 703-725, May.
    8. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June.
    9. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    10. Helge Berger & Jakob De Haan & Sylvester C.W. Eijffinger, 2001. "Central Bank Independence: An Update of Theory and Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 15(1), pages 3-40, February.
    11. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316.
    12. MacRae, C Duncan, 1977. "A Political Model of the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 85(2), pages 239-263, April.
    13. Forder, James, 1998. "The case for an independent European central bank: A reassessment of evidence and sources," European Journal of Political Economy, Elsevier, vol. 14(1), pages 53-71, February.
    14. 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.
    15. Herrendorf, Berthold & Lockwood, Ben, 1997. "Rogoff's "Conservative" Central Banker Restored," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 476-495, November.
    16. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    17. Rik Hafer & David C. Wheelock, 2001. "The rise and fall of a policy rule: monetarism at the St. Louis Fed, 1968-1986," Review, Federal Reserve Bank of St. Louis, vol. 83(Jan), pages 1-24.
    18. Hayo, Bernd, 1998. "Inflation culture, central bank independence and price stability," European Journal of Political Economy, Elsevier, vol. 14(2), pages 241-263, May.
    19. Robert Dittmar & William T. Gavin, 2000. "What do New-Keynesian Phillips Curves imply for price-level targeting?," Review, Federal Reserve Bank of St. Louis, vol. 82(Mar), pages 21-30.
    20. Laurence Ball, 1999. "Efficient Rules for Monetary Policy," International Finance, Wiley Blackwell, vol. 2(1), pages 63-83, April.
    21. Gartner, Manfred, 1994. "Democracy, elections, and macroeconomic policy: Two decades of progress," European Journal of Political Economy, Elsevier, vol. 10(1), pages 85-109, May.
    22. Alberto Alesina, 1987. "Macroeconomic Policy in a Two-Party System as a Repeated Game," The Quarterly Journal of Economics, Oxford University Press, vol. 102(3), pages 651-678.
    23. Demertzis, Maria & Hughes Hallett, Andrew & Viegi, Nicola, 2004. "An independent central bank faced with elected governments," European Journal of Political Economy, Elsevier, vol. 20(4), pages 907-922, November.
    24. Bruno S. Frey & Hans-Jürgen Ramser, 1976. "The Political Business Cycle: A Comment," Review of Economic Studies, Oxford University Press, vol. 43(3), pages 553-555.
    25. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    26. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    27. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
    28. Frode Brevik & Manfred Gärtner, 2005. "Partisan Theory and the New Keynesian and Sticky-Information Phillips Curves," University of St. Gallen Department of Economics working paper series 2005 2005-25, Department of Economics, University of St. Gallen.
    29. Svensson, Lars E O, 1999. "Price-Level Targeting versus Inflation Targeting: A Free Lunch?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 277-295, August.
    30. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-984, November.
    31. Gert Peersman & Frank Smets, 1999. "Uncertainty and the Taylor rule in a simple model of the Euro-area economy," Proceedings, Federal Reserve Bank of San Francisco.
    32. Forder, James, 1998. "Central Bank Independence--Conceptual Clarifications and Interim Assessment," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 307-334, July.
    33. William D. Nordhaus, 1975. "The Political Business Cycle," Review of Economic Studies, Oxford University Press, vol. 42(2), pages 169-190.
    34. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-167, March.
    35. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
    36. Hayo, Bernd & Hefeker, Carsten, 2002. "Reconsidering central bank independence," European Journal of Political Economy, Elsevier, vol. 18(4), pages 653-674, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Belongia, Michael T. & Ireland, Peter N., 2017. "Circumventing the zero lower bound with monetary policy rules based on money," Journal of Macroeconomics, Elsevier, vol. 54(PA), pages 42-58.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Manfred Gärtner, 2002. "Monetary policy and central bank behaviour," University of St. Gallen Department of Economics working paper series 2002 2002-24, Department of Economics, University of St. Gallen.
    2. Gartner, Manfred, 2000. "Political Macroeconomics: A Survey of Recent Developments," Journal of Economic Surveys, Wiley Blackwell, vol. 14(5), pages 527-561, December.
    3. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
    4. Richard Mash, 2000. "The Time Inconsistency of Monetary Policy with Inflation Persistence," Economics Series Working Papers 15, University of Oxford, Department of Economics.
    5. Walsh, Carl E, 2003. "Accountability, Transparency, and Inflation Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 829-849, October.
    6. P Arestis & A Mihailov, 2009. "Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy," Economic Issues Journal Articles, Economic Issues, vol. 14(2), pages 27-54, September.
    7. Hughes Hallett, Andrew & Libich, Jan, 2006. "Central Bank Independence, Accountability and Transparency: Complements or Strategic Substitutes?," CEPR Discussion Papers 5470, C.E.P.R. Discussion Papers.
    8. repec:rdg:wpaper:em-dp2007-53 is not listed on IDEAS
    9. D. Masciandaro, 2019. "What Bird Is That? Central Banking And Monetary Policy In The Last Forty Years," BAFFI CAREFIN Working Papers 19127, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    10. Donato Masciandaro & Davide Romelli, 2019. "Behavioral Monetary Policymaking: Economics, Political Economy and Psychology," World Scientific Book Chapters, in: Behavioral Finance The Coming of Age, chapter 9, pages 285-329, World Scientific Publishing Co. Pte. Ltd..
    11. 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(3), pages 259-289, December.
    12. Henrik Jensen, 2002. "Targeting Nominal Income Growth or Inflation?," American Economic Review, American Economic Association, vol. 92(4), pages 928-956, September.
    13. Libich Jan, 2011. "Inflation Nutters? Modelling the Flexibility of Inflation Targeting," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-36, June.
    14. Dennis, Richard & Soderstrom, Ulf, 2006. "How Important Is Precommitment for Monetary Policy?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 847-872, June.
    15. Philip Arestis & Alexander Mihailov, 2011. "Classifying Monetary Economics: Fields And Methods From Past To Future," Journal of Economic Surveys, Wiley Blackwell, vol. 25(4), pages 769-800, September.
    16. Junhan Kim, 2011. "Inflation Targeting as Constrained Discretion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(7), pages 1505-1522, October.
    17. Carl Walsh, 2003. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 93(1), pages 265-278, March.
    18. Jan Libich, 2006. "Inflexibility Of Inflation Targeting Revisited: Modeling The "Anchoring" Effect," CAMA Working Papers 2006-02, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    19. Paul Hubert, 2010. "Monetary Policy, Imperfect Information and the Expectations Channel," Sciences Po publications info:hdl:2441/f4rshpf3v1u, Sciences Po.
    20. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777, June.
    21. Eric Dubois, 2016. "Political Business Cycles 40 Years after Nordhaus," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01291401, HAL.

    More about this item

    Keywords

    Utility Function; Monetary Policy; Public Choice; Phillips Curve; Performance Contract;
    All these keywords.

    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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:sprchp:978-0-387-75870-1_24. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.springer.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.