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A Political Agency Theory of Central Bank Independence
Author:
Mr. Gauti B. Eggertsson null

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Mr. Eric Le Borgne null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2003: Issue 144
Language:
English
Publication Date:
01 Jul 2003
DOI:
https://doi.org/10.5089/9781451856460.001
ISBN:
9781451856460
ISSN:
1018-5941
Pages:
44
Keywords:
WP; central bank; Central Bank Independece; Career Concerns; Elections; Experimetation; inflation bias; instrument independence; second-period politician; second period; central bank governor; politician's rent; nominal interest rate; ex ante utility; Central bank autonomy; Inflation; Monetary policy frameworks; Output gap; Human resources in revenue administration
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund