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

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  • Carsten Hefeker
  • Blandine Zimmer

Abstract

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.

Suggested Citation

  • Carsten Hefeker & Blandine Zimmer, 2011. "Central Bank Independence and Conservatism under Uncertainty: Substitutes or Complements?," CESifo Working Paper Series 3344, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3344
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    References listed on IDEAS

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    More about this item

    Keywords

    central bank independence; conservatism; transparency;

    JEL classification:

    • 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

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