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Central bank design in general equilibrium

  • James Bullard
  • Christopher J. Waller

We study the effects of alternative institutional arrangements for the determination of monetary policy in the context of a capital-theoretic, general equilibrium economy. In the absence of an institutional arrangement, there is a continuum of steady state equilibria indexed by rates of inflation ranging from the Friedman rule to high a high level. The social optimum is associated with the Friedman rule.. We consider three institutional arrangements for determining monetary policy. The first, unconditional majority voting, always leads to a substantial inflation bias. The second, a simple form of bargaining which we interpret as a policy board, generally improves on the unconditional majority voting outcome. Finally, we consider a form of constitutional rule which always achieves the social optimum.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1998-002.

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Date of creation: 2002
Date of revision:
Publication status: Published in Journal of Money, Credit, and Banking, February 2004, 36(1), pp. 95-113
Handle: RePEc:fip:fedlwp:1998-002
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  1. Obstfeld, Maurice, 1991. "Dynamic Seigniorage Theory: An Exploration," CEPR Discussion Papers 519, C.E.P.R. Discussion Papers.
  2. 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.
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  6. Svensson, L.E.O., 1995. "Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts," Papers 595, Stockholm - International Economic Studies.
  7. Costas Azariadis & Vincenzo Galasso, 1996. "Discretion, rules and volatility," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 65-74.
  8. 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 473-91, June.
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  10. Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 7-29, January.
  11. Jon Faust, 1992. "Whom can we trust to run the Fed? Theoretical support for the founders' views," International Finance Discussion Papers 429, Board of Governors of the Federal Reserve System (U.S.).
  12. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  13. Peter N. Ireland, 1999. "Expectations, Credibility, and Time-Consistent Monetary Policy," Boston College Working Papers in Economics 425, Boston College Department of Economics.
  14. V.V. Chari & Patrick J. Kehoe, 1989. "Sustainable plans," Staff Report 122, Federal Reserve Bank of Minneapolis.
  15. Ireland, Peter N., 1997. "Sustainable monetary policies," Journal of Economic Dynamics and Control, Elsevier, vol. 22(1), pages 87-108, November.
  16. Christopher J. Waller, 2000. "Policy Boards And Policy Smoothing," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 305-339, February.
  17. Waller, Christopher J, 1989. "Monetary Policy Games and Central Bank Politics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(4), pages 422-31, November.
  18. Loewy, Michael B., 1988. "Equilibrium policy in an overlapping generations economy," Journal of Monetary Economics, Elsevier, vol. 22(3), pages 485-499.
  19. Michele Boldrin & Aldo Rustichini, 2000. "Political Equilibria with Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 41-78, January.
  20. Waller, Christopher J., 1992. "A bargaining model of partisan appointments to the central bank," Journal of Monetary Economics, Elsevier, vol. 29(3), pages 411-428, June.
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