Central Bank Independence and Accountability Under Complete Information

Francesca Castellani ()

No 05-2001, IHEID Working Papers from Economics Section, The Graduate Institute of International Studies

Abstract: This paper investigates the accountability of the independent monetary authority in the case of strategic interaction between the delegating authority (government) and the agent (central bank) in the policy game with complete information. As the unelected monetary authority is not the by-product of society's preferences, delegation turns out to be socially costly. Two main results emerge from the model. First, a monetary stance biased towards price stability makes the optimal fiscal strategy time-inconsistent, destroys the credibility of the mandate to deliver the socially optimum inflation rate and prevents the monetary authority from being held accountable for achieving it. Hence, delegation results ill-designed to make the monetary authority both independent and accountable. To this end, specific policy coordination mechanisms may have to be imposed on the fiscal authority to complement the delegation mechanism. Second, in the case where the government can precommit on fiscal strategies, no fiscal arrangement is ineeded and strict inflation targeting allows the central bank to be accountable.

Keywords: central bank accountability; inflation targeting; fiscal restraints (search for similar items in EconPapers)
Pages: 30
Date: 2001-10-10
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (4)

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