DP3336 Independence before Conservatism: Transparency, Politics and Central Bank Design

Author(s): Andrew Hughes Hallett, Diana Weymark
Publication Date: April 2002
Keyword(s): central bank conservatism, central bank independence, credibility, flexible response, monetary policy delegation, policy coherence, transparency
JEL(s): E52
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3336

The problem of monetary policy delegation is formulated as a two-stage game between the government and the central bank. In the first stage the government chooses the institutional design of the central bank. Monetary and fiscal policy are implemented in the second stage. When fiscal policy is taken into account, there is a continuum of combinations of central bank independence and conservatism that produce optimal outcomes. This indeterminacy is resolved by appealing to practical considerations. In particular, it is argued that full central bank independence facilitates the greatest degree of policy transparency and political coherence.