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Bargaining over monetary policy in a monetary union and the case for appointing an independent central banker

  • Corinne Aaron-Cureau

    (Universite Paris-1 Pantheon-Sorbonne)

  • Hubert Kempf

    (Universite Paris-1 Pantheon-Sorbonne)

We set up a model of a monetary union where decisions over monetary policy are made through bargaining between two governments with different objectives. They can either choose to directly bargain over monetary policy or to delegate monetary decisions to an independent central banker. In the latter case, the choice of the central banker is obtained by bargaining between the two governments. We show that, the bargaining power being constant, the delegation of monetary policy to an independent central banker does not necessarily incur a smaller inflation bias nor is systematically welfare improving for any government. It may happen that both governments are better-off when they directly bargain. Copyright 2006, Oxford University Press.

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Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2004 with number 85.

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Date of creation: 17 Sep 2004
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Handle: RePEc:mmf:mmfc04:85
Contact details of provider: Web page: http://www.essex.ac.uk/afm/mmf/index.html

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  1. Forder, James, 1998. "The case for an independent European central bank: A reassessment of evidence and sources," European Journal of Political Economy, Elsevier, vol. 14(1), pages 53-71, February.
  2. 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.
  3. Faust, Jon, 1996. "Whom can we trust to run the Fed? Theoretical support for the founders' views," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 267-283, April.
  4. Sibert, Anne, 1999. "Monetary Policy Committees: Individual and Collective Reputations," CEPR Discussion Papers 2328, C.E.P.R. Discussion Papers.
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  8. 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.
  9. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March.
  10. Eijffinger, Sylvester C W & Hoeberichts, Marco, 1998. "The Trade off between Central Bank Independence and Conservativeness," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 397-411, July.
  11. Lockwood, Ben & Miller, Marcus & Zhang, Lei, 1998. "Designing Monetary Policy When Unemployment Persists," Economica, London School of Economics and Political Science, vol. 65(259), pages 327-45, August.
  12. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  13. McCallum, Bennett T., 1997. "Crucial issues concerning central bank independence," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 99-112, June.
  14. 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.
  15. Gartner, Manfred, 2000. " Political Macroeconomics: A Survey of Recent Developments," Journal of Economic Surveys, Wiley Blackwell, vol. 14(5), pages 527-61, December.
  16. Alesina, Alberto & Gatti, Roberta, 1995. "Independent Central Banks: Low Inflation at No Cost?," American Economic Review, American Economic Association, vol. 85(2), pages 196-200, May.
  17. Timberlake, Richard H., 1993. "Monetary Policy in the United States," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226803845.
  18. 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.).
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