DP1842 Independently Blue? Accountability and Independence in the New European Central Bank

Author(s): Maria Demertzis, Andrew Hughes Hallett
Publication Date: March 1998
Keyword(s): asymmetries, Cooperation, Fiscal-monetary interactions, incentives for independence, Monetary Union
JEL(s): E52, E63, F42
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1842

Most of the literature on the independence of the Central Bank assumes only one policy instrument is available: monetary policy. If we introduce fiscal policy as well, when preferences may differ among policy-makers, the situation is radically different. In this case fiscal policy will weaken substantially the impact of the Central Bank?s actions, and may annihilate them altogether. The Stability Pact may then be a liability, instead of an asset, because it renders both policies impotent (even if credible). We examine whether there is any incentive to retain monetary policy independence; and whether accountability can and should be used to ensure fiscal and monetary policies support each other, rather than destroy each other.