Bargaining over monetary policy in a monetary union and the case for appointing an independent central banker

Abstract

We set up a model of a monetary union where decisions over monetary policy are made through bargaining between two governments with different objectives. They can either choose to directly bargain over monetary policy or to delegate monetary decisions to an independent central banker. In the latter case, the choice of the central banker is obtained by bargaining between the two governments. We show that, the bargaining power being constant, the delegation of monetary policy to an independent central banker does not necessarily incur a smaller inflation bias nor is systematically welfare improving for any government. It may happen that both governments are better-off when they directly bargain. Copyright 2006, Oxford University Press.