A Political Agency Theory of Central Bank Independence

IMF Working Papers, July 1, 2003

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A Political Agency Theory of Central Bank Independence

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Bibliographic details

• Authors: Gauti B. Eggertsson, Eric Le Borgne
• Published: July 1, 2003
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451856460.001

Theory overview

• Proposes a theory explaining why, and under what circumstances, a politician gives up rent and delegates policy tasks to an independent agency.
• Extends a standard dynamic "New-Keynesian" stochastic general equilibrium model.
• Presents a new theory of central bank independence that is unrelated to the standard inflation bias problem.

Application to monetary policy

• The theory is applied to monetary policy by embedding the political-agency framework within the "New-Keynesian" model.
• The model yields several new predictions about central bank behavior and delegation.

Main findings and predictions

• Derives several new predictions and shows that they are consistent with the data.
• Shows that while instrument independence of the central bank is desirable, goal independence is not.
• Keywords and concepts emphasized in the analysis include:
  • Career Concerns
  • central bank governor
  • Central Bank Independece
  • Elections
  • ex ante utility
  • Experimetation
  • Human resources in revenue administration
  • inflation bias
  • instrument independence
  • nominal interest rate
  • Output gap
  • politician's rent
  • second period, second-period politician

Policy implications

• Instrument independence of the central bank is desirable.
• Goal independence of the central bank is not desirable.

Publication and metadata

• Authors: Gauti B. Eggertsson, Eric Le Borgne
• Date: July 1, 2003
• Series: Working Paper No. 2003/144
• Issue: 144
• Volume: 2003
• Pages: 44
• DOI: https://doi.org/10.5089/9781451856460.001
• Stock No: WPIEA1442003
• ISBN: 9781451856460
• ISSN: 1018-5941
• Subject tags: Banking, Central bank autonomy, Central banks, Human resources in revenue administration, Inflation, Monetary policy, Monetary policy frameworks, Output gap, Prices, Production, Revenue administration, Tax incentives
• Note: "This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate."

Source: A Political Agency Theory of Central Bank Independence, IMF Working Paper No. 2003/144.

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