DP752 Central Banking as a Political Principal-Agent Problem
|Author(s):||Michele Fratianni, Jürgen von Hagen, Christopher Waller|
|Publication Date:||January 1993|
|Keyword(s):||Central Banking, Monetary Policy, Political Business Cycles|
|JEL(s):||E31, E32, E58|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=752|
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.