A Political Agency Theory of Central Bank Independence

Gauti Eggertsson and Eric Le Borgne

No 2003/144, IMF Working Papers from International Monetary Fund

Abstract: We propose a theory to explain why, and under what circumstances, a politician gives up rent and delegates policy tasks to an independent agency. We apply this theory to monetary policy by extending a standard dynamic "New-Keynesian" stochastic general equilibrium model. This model gives a new theory of central bank independence that is unrelated to the standard inflation bias problem. We derive several new predictions and show that they are consistent with the data. Finally, we show that while instrument independence of the central bank is desirable, goal independence is not.

Keywords: WP; central bank; Central Bank Independece; Career Concerns; Elections; Experimetation; inflation bias; instrument independence; second-period politician; second period; central bank governor; politician's rent; nominal interest rate; ex ante utility; Central bank autonomy; Inflation; Monetary policy frameworks; Output gap; Human resources in revenue administration (search for similar items in EconPapers)
Pages: 44
Date: 2003-07-01
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Citations: View citations in EconPapers (12)

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Related works:
Journal Article: A Political Agency Theory of Central Bank Independence (2010)
Journal Article: A Political Agency Theory of Central Bank Independence (2010)
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