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An Independent Central Bank Faced With Elected Governments

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  • Demertzis, Maria
  • Hughes Hallett, Andrew

Abstract

The literature argues that the benefits of an independent Central Bank accrue at no cost to the real side. In this paper, we argue that the lack of correlation between monetary autonomy and output variability is due to the proactive role of fiscal policy when faced with rigid monetary objectives. None of the attempts in the literature to measure these correlations allow for a changing fiscal role. As monetary policy is handled by an independent authority, fiscal and wage/social protection policies remain an instrument in the hands of national governments. We find that so long as the two authorities pursue their goals independently of each other, a conflict arises which is exacerbated as preferences diverge. Further to that we find that the establishment of a conservative Central Bank encourages more left-wing preferences amongst the public (as reflected in the governments they elect). And the election of more left-wing governments makes it more difficult for each authority to reach their own preferred objectives, unless they are able to cooperate.

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  • Demertzis, Maria & Hughes Hallett, Andrew, 1999. "An Independent Central Bank Faced With Elected Governments," CEPR Discussion Papers 2219, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:2219
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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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