Delegation of Monetary Policy: More than a Relocation of the Time-Inconsistency Problem

22 Pages Posted: 29 Jul 2003

See all articles by John Driffill

John Driffill

University of London - Birkbeck College; Centre for Economic Policy Research (CEPR)

Zeno Rotondi

UNICREDIT; LUISS Guido Carli University

Date Written: June 2003


It has been argued that delegation of monetary policy to an independent central bank, which acts as an agent for the government, does not mitigate the problem of time-inconsistency, but merely relocates it. We argue here that this is not so, and that delegation enables a wider class of economies to sustain zero inflation than would be able to do so in its absence. We consider an economy in which the government faces re-appointment costs, that is, costs associated with sacking one central banker and replacing them with another, costs which are intended to protect central bank independence. We show that, by means of suitable announcements of incentive schemes for the central bank, combined with appropriate actually implemented schemes, delegated policy enables zero inflation to prevail in economies in which it could not do so without delegated policy. These economies are ones that have relatively high discount rates (and so low discount factors).

Keywords: Credibility, delegation, time-inconsistency, independent central banks, monetary policy

JEL Classification: E31, E58, E61

Suggested Citation

Driffill, John and Rotondi, Zeno, Delegation of Monetary Policy: More than a Relocation of the Time-Inconsistency Problem (June 2003). Available at SSRN:

John Driffill (Contact Author)

University of London - Birkbeck College ( email )

London, WC1E 7HX
United Kingdom
+44 20 7631 6417 (Phone)
+44 20 7631 6416 (Fax)

Centre for Economic Policy Research (CEPR)

United Kingdom

Zeno Rotondi

UNICREDIT ( email )

ROME, 00186


LUISS Guido Carli University ( email )

Via O. Tommasini 1
Rome, Roma 00100

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