The politics of central bank independence: a theory of pandering and learning in government

Gauti Eggertsson and Eric Le Borgne

No 205, Staff Reports from Federal Reserve Bank of New York

Abstract: We propose a theory to explain why, and under what circumstances, a politician endogenously gives up rent and delegates policy tasks to an independent agency. Applied to monetary policy, this theory (i) formalizes the rationale for delegation highlighted by Alexander Hamilton, the first Secretary of the Treasury of the United States, and by Alan S. Blinder, former Vice Chairman of the Board of Governors of the Federal Reserve System; and (ii) does not rely on the inflation bias that underlies most existing theories of central bank independence. Delegation trades off the cost of having a possibly incompetent technocrat with a long-term job contract against the benefit of having a technocrat who (i) invests more effort into the specialized policy task and (ii) has less incentive to pander to public opinion than a politician. Our key theoretical predictions are broadly consistent with the data.

Keywords: Political science; Banks and banking, Central; Monetary policy (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-pol
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Citations: View citations in EconPapers (4)

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