DP1148 Can Delegation be Counterproductive? The Choice of 'Conservative' Bankers in Open Economies

Author(s): David Currie, Paul L Levine, Joseph Pearlman
Publication Date: March 1995
Keyword(s): Conservative Bankers, Delegation Game, Monetary Policy, Open Economy
JEL(s): E52, E58, F33
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1148

This paper provides a comprehensive assessment of the open economy aspects of the 'delegation game' in which the operation of monetary policy is delegated to independent and `conservative' central bankers with a greater dislike of inflation than the public. When all countries optimally and independently choose the conservatism of their bankers a highly inefficient Nash equilibrium can result. This inefficiency increases as the number of countries increases, the correlation of shocks increases, and if there is unemployment persistence. Delegation can be counterproductive in the sense that the non-cooperative equilibrium of the delegation game results in a lower welfare than that of the representative bankers game.