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An Independent Central Bank faced with Elected Government: A Political Economy Conflict

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  • M. Demertzis
  • A. Hughes Hallett
  • N. Viegi

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. Few of the attempts to measure these correlations actually allow for a changing fiscal role. Yet, when monetary policy is handled by an independent authority, fiscal and wage/social protection policies remain as an instrument in the hands of elected governments. We find that, so long as the two authorities pursue their goals independently of each other, a conflict arises which becomes stronger as preferences diverge. Further to that, we find that the establishment of a conservative Central Bank encourages more divergent preferences amongst the public (as reflected in the governments they elect). The election of more interventionist governments then makes it harder for either authority to reach their own preferred objectives, unless they are able to co-operate.

Suggested Citation

  • M. Demertzis & A. Hughes Hallett & N. Viegi, 2002. "An Independent Central Bank faced with Elected Government: A Political Economy Conflict," WO Research Memoranda (discontinued) 686, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:wormem:686
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    References listed on IDEAS

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    Cited by:

    1. Silvia Sgherri, 2002. "The fiscal dimension of a common monetary policy: results with a non-Ricardian global model," The European Journal of Finance, Taylor & Francis Journals, vol. 8(4), pages 449-479.

    More about this item

    Keywords

    Central Bank Independence; Accountability; Fiscal policy; Political Uncertainty;

    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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