Institutions for Monetary Stability

Christina Duckworth Romer and David Romer ()

No 5557, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper demonstrates that failures in monetary policy arise not just from dynamic inconsistency, but more importantly, from imperfect understanding of the economy and the effects of policy. Using recent and historic episodes from the United States and abroad, we show that limited knowledge on the part of economists, policymakers, elected leaders, and voters has been an important source of monetary policy mistakes. We then analyze what institutions of monetary policy could address the problems of both dynamic inconsistency and limited knowledge. Our analysis suggests that one set of institutions that could do this is a highly independent central bank with discretion about both the goals and the conduct of policy, combined with a two-level structure where elected leaders appoint a board of trustees for the central bank, which in turn selects the actual policymakers. We conclude by discussing recent and proposed reforms in monetary policy and institutions in industrialized countries in light of this analysis.

JEL-codes: E52 D58 (search for similar items in EconPapers)
Date: Written
Note: ME
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Chapter: Institutions for Monetary Stability (1997)
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