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Inflation, Government Transfers, and Optimal Central Bank Independence

  • Diana N. Weymark


    (Department of Economics, Vanderbilt University)

The problem of monetary policy delegation is formulated as a two-stage non-cooperative game between the government and the central bank. The solution to this policy game determines the optimal combination of central bank conservatism and independence. The results show that the optimal institutional design always requires some degree of central bank independence and that there is substitutability between central bank independence and conservatism. The results also show that partial central bank independence can be optimal and that there are circumstances under which it is optimal for the government to appoint a liberal central banker.

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File Function: First version, 2005
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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0502.

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Date of creation: Jan 2005
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Handle: RePEc:van:wpaper:0502
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