A Political Agency Theory of Central Bank Independence

July 1, 2003

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Format: Chicago

Gauti B. Eggertsson, and Eric Le Borgne. A Political Agency Theory of Central Bank Independence, (USA: International Monetary Fund, 2003) accessed December 26, 2024

Disclaimer: 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

Summary

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.

Subject: 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

Keywords: Career Concerns, Central bank, Central bank autonomy, Central bank governor, Central Bank Independece, Elections, Ex ante utility, Experimetation, Human resources in revenue administration, Inflation, Inflation bias, Instrument independence, Monetary policy frameworks, Nominal interest rate, Output gap, Politician's rent, Second period, Second-period politician, WP

Publication Details

Pages:

44
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/144
Stock No:

WPIEA1442003
ISBN:

9781451856460
ISSN:

1018-5941

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