Citation

Discussion Paper Details

Please find the details for DP752 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Central Banking as a Political Principal-Agent Problem

Author(s): Michele Fratianni, Jürgen von Hagen and Christopher Waller

Publication Date: January 1993

Keyword(s): Central Banking, Monetary Policy and Political Business Cycles

Programme Area(s): International Macroeconomics

Abstract: An inflation and stabilization bias may arise as a result of the principal-agent nature of monetary policy. Both depend on the degree of political uncertainty and the type of relationship between central bankers and the incumbent political leaders. Specifically, our analysis indicates how a close relationship between central bankers and incumbent political leaders can lead to undesirable outcomes, particularly so during periods of electoral competition and political uncertainty. Various institutional proposals exist for resolving this problem. Our analysis shows that in contrast to Friedman-type policy rules or the appointment of `conservative' central bankers, personal independence of the central banker from government or performance-orientated compensation packages can achieve both optimal stabilization and the elimination of the inflation bias.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=752

Bibliographic Reference

Fratianni, M, von Hagen, J and Waller, C. 1993. 'Central Banking as a Political Principal-Agent Problem'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=752