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Do central bankers have to be conservative?

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  • Andrew P Blake
  • Peter F Westaway

Abstract

Should a macroeconomic policymaker surrender the instruments of monetary policy to an independent central bank? The conventional rationale for any government abandoning sovereignty is that although central bankers may attach a higher cost to inflation than the government itself, it may still be beneficial to cede control because the private sector may perceive that the central bank has greater anti‐inflationary credibility. This paper argues that the case for 'tying ones hands' is more complicated than this depending on three features of the problem. The first is the relative length of the precommitment periods of the central bank and the policymaker. In this paper the authors allow for precommitment periods that are not restricted to either one or infinity. Secondly, the central banker or policymaker may exercise leadership. Thirdly, there may be the differences in costs attached to the policy targets, i.e. the relative degree of conservatism. These points are illustrated using both static and dynamic models, and tested empirically using the NIESR econometric model of the UK economy. Contact NIESR if copy required

Suggested Citation

  • Andrew P Blake & Peter F Westaway, 1992. "Do central bankers have to be conservative?," National Institute of Economic and Social Research (NIESR) Discussion Papers 26, National Institute of Economic and Social Research.
    • Handle: RePEc:nsr:niesrd:26
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    Cited by:

    1. Bas Aarle & Lans Bovenberg & Matthias Raith, 1995. "Monetary and fiscal policy interaction and government debt stabilization," Journal of Economics, Springer, vol. 62(2), pages 111-140, June.

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