The Trade Off Between Central Bank Independence and Conservativeness

This paper introduces a parameter for central bank independence in a monetary policy game with a conservative central banker.It tries to explain the optimal degree of central bank independence and conservativeness by four economic and political determinants, both theoretically and empirically.There appears to be a trade off between central bank independence and conservativeness.Then, by comparing the optimal degree of conservativeness and independence with the actual degree of independence, we want to identify the optimal degree of conservativeness for the countries participating in EMU.central banks;independence;conservativeness

The design of monetary institutions

Abstract: Monetary institutions differ considerably between the main industrial countries. Differences in preferences, labor market characteristics, political stability and the structure of the economy make that different countries have different needs. These different needs are also reflected in the design of monetary institutions or, more specifically, central banks. This book takes a political economy view on monetary policy making. Our starting point is that the central bank and rational agents in the private economy interact strategically. The central bank sets monetary policy (usually the rate of inflation) and the private agents rationally form expectations about the rate of inflation. The monetary policy maker has an information advantage about the state of the economy and in the last part of this book also about its own preferences. Using this simple game-theoretic framework, we analyze the effects of different institutional set-ups on macroeconomic policy outcomes.

Central Bank independence: A sensitivity analysis

central banks;independence;sensitivity analysis

Incentive Contracts for Central Bankers under Uncertainty: Walsh-Svensson Non-Equivalence Revisited

We look at the implications of uncertain monetary policy preferences for the targeting and contracting approach to monetary stability. It turns out that in presence of uncertain preferences a linear incentive contract in the sense of Walsh (1995) performs better in terms of social welfare than an explicit inflation target as proposed by Svensson (1997). The reason is that, although both approaches can get rid of the inflationary bias, the impact of uncertain preferences on the variance of inflation will be considerably higher with an inflation target. We also find that on top of an optimal linear contract or target, a quadratic contract, in the sense of Rogoff's (1985) "weight-conservative" central banker, improves the outcome. In the case of an inflation target, a more conservative banker is needed than with a Walsh contract.non-linearities;economic fluctuations;inflation targets;optimal contracts

Why Money Talks and Wealth Whispers: Monetary Uncertainty and Mystique

This paper analyzes the effect of monetary uncertainty on the inflationary bias and the variance of output and inflation. Monetary policy uncertainty is modeled as a shock to the central banker’s preference for inflation stabilization relative to output stabilization that cannot be observed by the public. We find that the mean and variance of inflation increase with the variance of this preference shock. However, unlike other studies, we find that monetary uncertainty may very well have a positive effect on output stabilization and therefore also on society’s welfare.credibility;flexibility;uncertainty

A Theory of Central Bank Accountability

This paper develops a theory of central bank accountability. Two aspects of accountability are considered. The first one is transparency of actual monetary policy, the second aspect is the question of who bears final responsibility for monetary policy. Monetary policy is transparent if there is little uncertainty about the central bankers preferences. Transparency enhances the central bank’s accountability. Another way to make the central bank accountable is to shift final responsibility for monetary policy in the direction of the government. This can be achieved by making the cost of overriding the central bank lower. The paper shows that accountability through transparency leads to a lower expected rate of inflation and less stabilization of supply shocks. Accountability through shifting final responsibility in the direction of the government leads to higher inflationary expectations and more stabilization of supply shocks.monetary policy;central banks;transparency;accountability