Is It Welfare Improving to Insulate Monetary Policy from the Political Arena?
This paper presents a two-party model in which partisan and opportunistic politicians have two options: (i) to reach an agreement with respect to the central banker before elections are held, which leads to elections becoming a toss up, or (ii) to let the citizens vote for their proposed central bankers, which endogenizes the probabilities of being elected. Parties want to appoint their ideal central bankers (partisan), they care about winning the elections (opportunistic), and they are risk-averse about the electoral results. The paper shows that, under some circunstances, both parties may be interested in leaving the appointment of the central banker out of the electoral contest.
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