Inflation, Income Redistribution, and Optimal
Central Bank Independence
Working Paper No. 01-W02R
Diana N. Weymark
ABSTRACT [article]
The problem of monetary policy delegation is
formulated as a two-stage non-cooperative game between the government and the central bank. The solution to this policy game determines the optimal combination of central bank
conservatism and independence. The results obtained show that the optimal combination of central bank conservatism and independence that minimizes government losses is not unique and that there is substitutability between these institutional characteristics. Consequently, partial central bank independence can be optimal. The framework I employ provides a theoretical
basis for interpreting the results obtained in empirical studies of the relationship
between inflation and central bank independence.
Keywords and Phrases: Central bank independence, inflation bias
JEL Classification Number: E52