Independence of the Central Bank

30 Pages Posted: 12 Oct 2008 Last revised: 14 Oct 2008

Date Written: October 11, 2008

Abstract

We present a model in which the central bank, the current government and the median voter interact strategically and repeatedly. If the central bank is completely independent, it can implement an equilibrium in which the monetary policy is tight and beneficial in the long run. However, if the central bank has only some degree of operational autonomy, then a sufficiently impatient population may impose a bad equilibrium in which the government and the central bank coordinate their actions to run a loose economic policy that benefits the short run and is very costly on the long run in terms of inflation and unemployment.

Note: Downloadable paper is in Portuguese.

Keywords: monetary policy, inflation, independence, central bank

JEL Classification: E42, E52, E58, P48

Suggested Citation

Mazali, Rogerio and Rodrigues-Neto, Jose Alvaro, Independence of the Central Bank (October 11, 2008). Available at SSRN: https://ssrn.com/abstract=1282610 or http://dx.doi.org/10.2139/ssrn.1282610

Rogerio Mazali

Catholic University of Brasilia ( email )

SGAN 916, Módulo B, Asa Norte
Brasília, DF 70790-160
Brazil
+55 61 3448-7192 (Phone)

HOME PAGE: http://www.ucb.br

No contact information is available for Jose Alvaro Rodrigues-Neto

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