Crucial Issues Concerning Central Bank Independence

Bennett McCallum

No 5597, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper argues, first, that it is inappropriate to presume that central banks will, in the absence of any tangible precommitment technology, inevitably behave in a `discretionary' fashion that implies an inflationary bias. Furthermore, there is no necessary tradeoff between `flexibility and commitment.' Second, to the extent that the absence of any precommitment technology is nevertheless a problem, it will apply to a consolidated central bank-plus-government entity as well as to the central bank alone. Thus contracts between governments and central banks do not overcome the motivation for dynamic inconsistency, they merely relocate it. Several implications are discussed.

JEL-codes: D58 E52 (search for similar items in EconPapers)
Date: 1996-05
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Published as Journal of Monetary Economics, Vol. 39, no. 1 (June 1997): 99-112.

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