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Inflation, Government Transfers, and Optimal Central Bank Independence

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  • Diana N. Weymark

    () (Department of Economics, Vanderbilt University)

Abstract

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.

Suggested Citation

  • 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.
  • Handle: RePEc:van:wpaper:0502
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    File URL: http://www.accessecon.com/pubs/VUECON/vu05-w02.pdf
    File Function: First version, 2005
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    References listed on IDEAS

    as
    1. Andrew Hughes Hallett & Diana N. Weymark, 2001. "The Cost of Heterogeneity in a Monetary Union," Vanderbilt University Department of Economics Working Papers 0128, Vanderbilt University Department of Economics.
    2. Hughes Hallett, Andrew & Weymark, Diana N., 2004. "Independent monetary policies and social equity," Economics Letters, Elsevier, vol. 85(1), pages 103-110, October.
    3. Jim Dolmas & Gregory W. Huffman & Mark A. Wynne, 2000. "Inequality, inflation, and central bank independence," Canadian Journal of Economics, Canadian Economics Association, vol. 33(1), pages 271-287, February.
    4. Cukierman Alex, 1992. "Central Bank Strategy, Credibility, And Independance: Theory And Evidence," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 3(4), pages 1-10, December.
    5. Eijffinger, S. & De Hann, J., 1995. "The Political Economy of Central Bank Independence," Papers 9587, Tilburg - Center for Economic Research.
    6. Alesina, Alberto & Tabellini, Guido, 1987. "Rules and Discretion with Noncoordinated Monetary and Fiscal Policies," Economic Inquiry, Western Economic Association International, vol. 25(4), pages 619-630, October.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Grégory Levieuge & Yannick Lucotte, 2014. "A Simple Empirical Measure of Central Banks' Conservatism," Southern Economic Journal, Southern Economic Association, vol. 81(2), pages 409-434, October.

    More about this item

    Keywords

    Central bank conservatism; central bank independence; inflation bias; liberal central banker;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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