Independently Blue? Accountability and Independence in the New European Central Bank
De Nederlandsche Bank - Research Department
Andrew J. Hughes
Cardiff Business School; Centre for Economic Policy Research (CEPR); Vanderbilt University - College of Arts and Science - Department of Economics
University of Pretoria - Department of Economics
CEPR Discussion Paper Series Number 1842
Most of the literature on the independence of the Central Bank assumes only one policy instrument is available: monetary policy. If we introduce fiscal policy as well, when preferences may differ among policy-makers, the situation is radically different. In this case fiscal policy will weaken substantially the impact of the Central Bank?s actions, and may annihilate them altogether. The Stability Pact may then be a liability, instead of an asset, because it renders both policies impotent (even if credible). We examine whether there is any incentive to retain monetary policy independence; and whether accountability can and should be used to ensure fiscal and monetary policies support each other, rather than destroy each other.
JEL Classification: E52, E63, F42
Date posted: July 15, 1998
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