Independence Before Conservatism: Transparency, Politics and Central Bank Design

25 Pages Posted: 28 May 2002

See all articles by Andrew J. Hughes

Andrew J. Hughes

Cardiff Business School; Centre for Economic Policy Research (CEPR); Vanderbilt University - College of Arts and Science - Department of Economics

Diana N. Weymark

Vanderbilt University - College of Arts and Science - Department of Economics; Western Washington University

Date Written: April 2002

Abstract

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

Hughes Hallett, Andrew J. and Weymark, Diana N., Independence Before Conservatism: Transparency, Politics and Central Bank Design (April 2002). Available at SSRN: https://ssrn.com/abstract=314223

Andrew J. Hughes Hallett (Contact Author)

Cardiff Business School ( email )

Aberconway Building
Cardiff CF10 3EU
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Centre for Economic Policy Research (CEPR)

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Vanderbilt University - College of Arts and Science - Department of Economics ( email )

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Diana N. Weymark

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States
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615-343-8495 (Fax)

HOME PAGE: http://people.vanderbilt.edu/~diana.weymark/

Western Washington University ( email )

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United States
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360-650-4844 (Fax)

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