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An Independent Central Bank faced with Elected Government: A Political Economy Conflict

Maria Demertzis, Andrew Hughes Hallett () and Nicola Viegi ()

WO Research Memoranda (discontinued) from Netherlands Central Bank, Research Department

Abstract: The literature argues that the benefits of an independent Central Bank accrue at no cost to the real side. In this paper, we argue that the lack of correlation between monetary autonomy and output variability, is due to the proactive role of fiscal policy when faced with rigid monetary objectives. Few of the attempts to measure these correlations actually allow for a changing fiscal role. Yet, when monetary policy is handled by an independent authority, fiscal and wage/social protection policies remain as an instrument in the hands of elected governments. We find that, so long as the two authorities pursue their goals independently of each other, a conflict arises which becomes stronger as preferences diverge. Further to that, we find that the establishment of a conservative Central Bank encourages more divergent preferences amongst the public (as reflected in the governments they elect). The election of more interventionist governments then makes it harder for either authority to reach their own preferred objectives, unless they are able to co-operate.

Keywords: Central Bank Independence; Accountability; Fiscal policy; Political Uncertainty (search for similar items in EconPapers)
JEL-codes: E52 E63 F42 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mon
Date: 2002-05
References: View references in EconPapers View complete reference list from CitEc
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:wormem:686

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