A Political Agency Theory of Central Bank Independence

Author/Editor:

Gauti B. Eggertsson ; Eric Le Borgne

Publication Date:

July 1, 2003

Electronic Access:

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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.

Series:

Working Paper No. 03/144

Subject:

English

Publication Date:

July 1, 2003

ISBN/ISSN:

9781451856460/1018-5941

Stock No:

WPIEA1442003

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

44

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