Are independent central banks really as conservative as they like to pretend?

Andrew Hughes Hallett

European Journal of Political Economy, 2008, vol. 24, issue 1, 239-248

Abstract: In a recent paper in this journal [Demertzis, M., Hughes Hallett, A., Viegi, N., 2004. An independent Central Bank faced with elected governments: European Journal of Political Economy 20, 907-922.] we showed that, when voting is endogenised, an independent and conservative Central Bank will create the tendency for elected governments to become more liberal or populist. That causes policies as well as preferences to diverge. But we did not show whether the Central Bank would then become more conservative in response, by way of disciplining the fiscal authority and protecting its own preferred targets. Building on these earlier results, we examine that question in this paper. I find that the Central Bank would, in its own interest, not retaliate in this fashion except where the government's target for output growth becomes very ambitious. This behaviour seems to match what little empirical evidence we have on Central Bank reactions.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:poleco:v:24:y:2008:i:1:p:239-248

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