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Constitutions and Central Bank Independence: An Objection to McCallum's Second Fallacy

Author

Listed:
  • Giordani, Paolo

    (Dept. of Economics, Stockholm School of Economics)

  • Spagnolo, Giancarlo

    (Dept. of Economics, Stockholm School of Economics)

Abstract

Most of the literature on monetary policy delegation assumes that the government can credibly commit to the delegation contract, an assumption criticized by McCallum. This paper provides foundations for the assumption that renegotiating a delegation contract can be costly by illustrating how political institutions can generate inertia in recontracting, reduce the gains from it or prevent it altogether. Once the nature of renegotiation costs has been clarified, it is easier to see why certain institutions can mitigate or solve dynamic inconsistencies better than others. The paper points to institutions which give Western democracies the technology to make credible delegation commitments, and argues that the ECB is an example of credible delegation.

Suggested Citation

  • Giordani, Paolo & Spagnolo, Giancarlo, 2001. "Constitutions and Central Bank Independence: An Objection to McCallum's Second Fallacy," SSE/EFI Working Paper Series in Economics and Finance 426, Stockholm School of Economics, revised 16 Mar 2001.
    • Handle: RePEc:hhs:hastef:0426
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    Citations

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    Cited by:

    1. Masciandaro, Donato, 2022. "Independence, conservatism, and beyond: Monetary policy, central bank governance and central banker preferences (1981–2021)," Journal of International Money and Finance, Elsevier, vol. 122(C).
    2. Bernd Hayo & Carsten Hefeker, 2001. "Do We Really Need Central Bank Independence? A Critical Re- examination," Macroeconomics 0103006, University Library of Munich, Germany.
    3. Donato Masciandaro, 2021. "Central Bank Governance in Monetary Policy Economics (1981-2020)," BAFFI CAREFIN Working Papers 21153, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    4. D. Masciandaro, 2019. "What Bird Is That? Central Banking And Monetary Policy In The Last Forty Years," BAFFI CAREFIN Working Papers 19127, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    5. Hayo, Bernd & Hefeker, Carsten, 2002. "Reconsidering central bank independence," European Journal of Political Economy, Elsevier, vol. 18(4), pages 653-674, November.

    More about this item

    Keywords

    constitution; delegation; inertia; renegotiation costs; separation of powers;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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