Alesina, A. And G. Tabellini (1987). ‘Rules and Discretion with Noncoordinated Monetary and Fiscal Policies’, Economic Inquiry XXV, 619-630.
Barro, R. And D. Gordon (1983a). ‘A Positive Theory of Monetary Policy in a Natural rate Model’, Journal of Political Economy 91, 589-610.
Barro, R. And D. Gordon (1983b). ‘Rules, Discretion and Reputation in a Model of Monetary Policy’, Journal of Monetary Economics 12, 101-121.
Debelle, G. And S. Fischer (1994). ‘How Independent Should a Central Bank Be?’, in Goals, Guidelines, and Constraints Facing Monetary Policy, edited by J. C. Fuhrer, Conference Series No. 38, Federal Reserve Bank of Boston, 195-221.
Jensen, H. (1992). ‘Time Inconsistency Problems and Commitments of Monetary and Fiscal Policies’, Journal of Economics 56, 247-266.
Kydland, F. And E. Prescott (1977). ‘Rules rather than Discretion: The Inconsistency of Optimal Plans’, Journal of Political Economy 85, 473-491.
Lohmann, S. (1992). ‘Optimal Commitment in Monetary Policy: Credibility versus Flexibility’, The American Economic Review 82, 273-286.
McCallum, B. (1995). ‘Two Fallacies Concerning Central-Bank Independence’, The American Economic Review 85, Papers and Proceedings, 207-211.
Rogoff, K. (1985). ‘The Optimal Degree of Commitment to and Intermediate Monetary Target’, The Quarterly Journal of Economics, November, 1169-1189.
An earlier version of this paper was presented at the 1998 Annual Meeting of the European Public Choice Society at the School of Economics and Commercial Law, Gothenburg, Sweden, April 1998. I am grateful to the participants at the meeting, particularly Jan Fidrmuc (Tilburg University), as well as Adam Bennett and Tonny Lybek for helpful advice and comments.
Consequently, the focus is on the central bank’s “goal independence”, i.e. its ability to set the inflation target independently of the FA, rather than its “instrument independence” (Debelle and Fischer (1994)).
However, it is by no means obvious that this cost is infinite, as Rogoff (1985) and Lohmann (1992) implicitly assume. If the analysis were extended to cover repeated games the good-will cost of cheating could be endogenized with respect to the FA’s reputation of overriding the MA, and it could conceivably be shown that the two ways to tackle the credibility problem (building up an anti-inflationary reputation and appointing a conservative central banker) are mutually reinforcing.