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Institutions for Monetary Stability


  • Christina D. Romer
  • David H. Romer


This paper demonstrates that failures in monetary policy arise not just from dynamic inconsistency, but more importantly, from imperfect understanding of the economy and the effects of policy. Using recent and historic episodes from the United States and abroad, we show that limited knowledge on the part of economists, policymakers, elected leaders, and voters has been an important source of monetary policy mistakes. We then analyze what institutions of monetary policy could address the problems of both dynamic inconsistency and limited knowledge. Our analysis suggests that one set of institutions that could do this is a highly independent central bank with discretion about both the goals and the conduct of policy, combined with a two-level structure where elected leaders appoint a board of trustees for the central bank, which in turn selects the actual policymakers. We conclude by discussing recent and proposed reforms in monetary policy and institutions in industrialized countries in light of this analysis.

Suggested Citation

  • Christina D. Romer & David H. Romer, 1996. "Institutions for Monetary Stability," NBER Working Papers 5557, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5557
    Note: ME

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    References listed on IDEAS

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    Cited by:

    1. JoAnne Morris & Tonny Lybek, 2004. "Central Bank Governance; A Survey of Boards and Management," IMF Working Papers 04/226, International Monetary Fund.
    2. Huh, Chan G. & Lansing, Kevin J., 2000. "Expectations, credibility, and disinflation in a small macroeconomic model," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 51-86.
    3. David Romer, 2003. "Misconceptions and Political Outcomes," Economic Journal, Royal Economic Society, vol. 113(484), pages 1-20, January.
    4. Svensson, Lars E O, 1999. " Inflation Targeting: Some Extensions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(3), pages 337-361, September.
    5. V A Muscatelli & Patrizio Tirelli, 1995. "Institutional Change, Inflation Targets and the Stability of Interest Rate Reaction Functions in OECD Economies"," Working Papers 9606, Business School - Economics, University of Glasgow, revised Apr 1996.
    6. Laxton, Douglas & Rose, David & Tambakis, Demosthenes, 1999. "The U.S. Phillips curve: The case for asymmetry," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1459-1485, September.
    7. Helge Berger & Marcel Thum, 2000. "News Management in Monetary Policy: When Central Banks Should Talk to the Government," German Economic Review, Verein für Socialpolitik, vol. 1(4), pages 465-493, November.
    8. J.M. Berk, 1998. "Monetary transmission: what do we know and how can we use it?," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 51(205), pages 145-170.
    9. Warren Coats & Marko Škreb, 2002. "Ten Years of Transition - Central Banking in the CEE and the Baltics," Surveys 7, The Croatian National Bank, Croatia.
    10. Kenneth S. Rogoff, 2003. "Globalization and global disinflation," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 77-112.
    11. J.M. Berk, 1998. "Monetary transmission: what do we know and how can we use it?," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 51(205), pages 145-170.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models


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