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Central Bank Independence and Conservatism under Uncertainty: Substitutes or Complements?

  • Carsten Hefeker
  • Blandine Zimmer

The paper examines the optimal combination of central bank independence and conservatism in the presence of uncertain central bank preferences. We develop a model of endogenous monetary policy delegation in which government chooses the central bank's degree of inde-pendence and conservatism so as to minimise society's loss function. We find that the optimal combination between independence and conservatism is not necessarily characterised by substitutability. When uncertainty about the central bank's preferences is high, independence and conservatism can become complements. In this case, giving more independence to the central bank increases the need for conservatism.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2011/wp-cesifo-2011-02/cesifo1_wp3344.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3344.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3344
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  18. Hughes Hallett, Andrew & Weymark, Diana, 2002. "Independence before Conservatism: Transparency, Politics and Central Bank Design," CEPR Discussion Papers 3336, C.E.P.R. Discussion Papers.
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  27. S[empty]rensen, Jan Rose, 1991. "Political uncertainty and macroeconomic performance," Economics Letters, Elsevier, vol. 37(4), pages 377-381, December.
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