The Trade Off between Central Bank Independence and Conservativeness

Abstract

This paper introduces a parameter for central bank independence in a monetary policy game with a conservative central banker. It tries to explain the optimal degree of central bank independence and conservativeness by four economic and political determinants, both theoretically and empirically. There appears to be a trade off between central bank independence and conservativeness. Then, by comparing the optimal degree of conservativeness and independence with the actual degree of independence, we want to identify the optimal degree of conservativeness for the countries participating in EMU.

JEL Classification: E58