Independence Before Conservatism: Transparency, Politics and Central Bank Design
25 Pages Posted: 28 May 2002
Date Written: April 2002
The problem of monetary policy delegation is formulated as a two-stage game between the government and the central bank. In the first stage the government chooses the institutional design of the central bank. Monetary and fiscal policy are implemented in the second stage. When fiscal policy is taken into account, there is a continuum of combinations of central bank independence and conservatism that produce optimal outcomes. This indeterminacy is resolved by appealing to practical considerations. In particular, it is argued that full central bank independence facilitates the greatest degree of policy transparency and political coherence.
Keywords: Central bank independence, central bank conservatism, monetary policy delegation, credibility, flexible response, transparency, policy coherence
JEL Classification: E52
Suggested Citation: Suggested Citation