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Central bank independence and conservatism under uncertainty: Substitutes or complements?

This paper revisits the trade-off between central bank independence and conservatism using a New Keynesian model with uncertainty about the central banker's output gap target. It is shown that when this uncertainty is high, the trade-off no longer holds. In this case, the optimal combination between independence and conservatism is characterised by complementarity.

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File URL: http://www.wiwi.uni-siegen.de/vwl/repec/sie/papers/140-10.pdf
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Paper provided by Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht in its series Volkswirtschaftliche Diskussionsbeiträge with number 140-10.

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Length: 17 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:sie:siegen:140-10
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Web page: http://www.uni-siegen.de/fb5/vwl/research/diskussionsbeitraege/
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  1. Christopher W. Crowe & Ellen E. Meade, 2008. "Central Bank Independence and Transparency; Evolution and Effectiveness," IMF Working Papers 08/119, International Monetary Fund.
  2. Cukierman, Alex & Lippi, Francesco, 1998. "Central Bank Independence, Centralization of Wage Bargaining, Inflation and Unemployment - Theory and Evidence," CEPR Discussion Papers 1847, C.E.P.R. Discussion Papers.
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  6. Lippi, Francesco, 2000. " Median Voter Preferences, Central Bank Independence and Conservatism," Public Choice, Springer, vol. 105(3-4), pages 323-38, December.
  7. Berger, Helge & de Haan, Jakob & Eijffinger, Sylvester C W, 2001. " Central Bank Independence: An Update of Theory and Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 15(1), pages 3-40, February.
  8. Muscatelli, Anton, 1998. "Optimal Inflation Contracts and Inflation Targets with Uncertain Central Bank Preferences: Accountability through Independence?," Economic Journal, Royal Economic Society, vol. 108(447), pages 529-42, March.
  9. Geraats Petra M., 2005. "Transparency and Reputation: The Publication of Central Bank Forecasts," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-28, February.
  10. Beetsma, Roel & Jensen, Henrik, 1997. "Inflation Targets and Contracts with Uncertain Central Banker Preferences," CEPR Discussion Papers 1562, C.E.P.R. Discussion Papers.
  11. Grüner, Hans Peter & Hayo, Bernd & Hefeker, Carsten, 2005. "Unions, wage setting and monetary policy uncertainty," Working Paper Series 0490, European Central Bank.
  12. Berger, Helge & Ehrmann, Michael & Fratzscher, Marcel, 2009. "Forecasting ECB monetary policy: Accuracy is a matter of geography," European Economic Review, Elsevier, vol. 53(8), pages 1028-1041, November.
  13. Helge Berger & Ulrich Woitek, 2005. "Does Conservatism Matter? A Time-Series Approach to Central Bank Behaviour," Economic Journal, Royal Economic Society, vol. 115(505), pages 745-766, 07.
  14. Alex Cukierman, 2007. "The limits of transparency," Proceedings, Federal Reserve Bank of San Francisco.
  15. Hughes Hallett, Andrew & Weymark, Diana, 2002. "Independence before Conservatism: Transparency, Politics and Central Bank Design," CEPR Discussion Papers 3336, C.E.P.R. Discussion Papers.
  16. Carsten Hefeker & Blandine Zimmer, 2009. "Uncertainty and fiscal policy in an asymmetric monetary union," MAGKS Papers on Economics 200913, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  17. Eijffinger, S.C.W. & Hoeberichts, M.M., 1998. "The trade off between central bank independence and conservativeness," Other publications TiSEM edcd13f6-471a-415a-b14e-5, Tilburg University, School of Economics and Management.
  18. Petra M. Geraats, 2009. "Trends in Monetary Policy Transparency," International Finance, Wiley Blackwell, vol. 12(2), pages 235-268, 08.
  19. Muscatelli, V Anton, 1999. "Inflation Contracts and Inflation Targets under Uncertainty: Why We Might Need Conservative Central Bankers," Economica, London School of Economics and Political Science, vol. 66(262), pages 241-54, May.
  20. Diana N. Weymark, 2005. "Inflation, Government Transfers, and Optimal Central Bank Independence," Vanderbilt University Department of Economics Working Papers 0502, Vanderbilt University Department of Economics.
  21. Nergiz Dincer & Barry Eichengreen, 2009. "Central Bank Transparency: Causes, Consequences and Updates," NBER Working Papers 14791, National Bureau of Economic Research, Inc.
  22. Siklos, Pierre L., 2008. "No single definition of central bank independence is right for all countries," European Journal of Political Economy, Elsevier, vol. 24(4), pages 802-816, December.
  23. Faust, Jon & Svensson, Lars E O, 1999. "The Equilibrium Degree of Transparency and Control in Monetary Policy," CEPR Discussion Papers 2195, C.E.P.R. Discussion Papers.
  24. 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.
  25. Niklas J. Westelius, 2006. "Imperfect Transparency and Shifts in the Central Bank's Output Gap Target," Economics Working Paper Archive at Hunter College 415, Hunter College Department of Economics, revised 2008.
  26. Jensen, Henrik, 2002. " Optimal Degrees of Transparency in Monetary Policymaking," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(3), pages 399-422, September.
  27. Frederic S. Mishkin, 2004. "Can Central Bank Transparency Go Too Far?," NBER Working Papers 10829, National Bureau of Economic Research, Inc.
  28. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-98, September.
  29. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  30. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  31. Berlemann, Michael & Hilscher, Kai, 2010. "Effective monetary policy conservatism: A comparison of 11 OECD countries," HWWI Research Papers 2-21, Hamburg Institute of International Economics (HWWI).
  32. Carsten Hefeker & Blandine Zimmer, 2008. "Uncertainty and Fiscal Policy in an Asymmetric Monetary Union," CESifo Working Paper Series 2389, CESifo Group Munich.
  33. Weymark, Diana N., 2007. "Inflation, government transfers, and optimal central bank independence," European Economic Review, Elsevier, vol. 51(2), pages 297-315, February.
  34. Petra Geraats, 2009. "Trends in Monetary Policy Transparency," CESifo Working Paper Series 2584, CESifo Group Munich.
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