Inflation, Government Transfers, and Optimal Central Bank Independence
Working Paper No. 05-W02
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 show that the optimal institutional design always requires some
degree of central bank independence and that there is substitutability between central bank
independence and conservatism. The results also show that partial central bank independence can
be optimal and that there are circumstances under which it is optimal for the
government to appoint a liberal central banker.
Keywords and Phrases: Central bank conservatism, central bank independence, inflation bias, liberal central banker
JEL Classification Number: E52