A Theory of Central Bank Accountability
CentER Discussion Paper Series No. 1998-103
Posted: 10 Aug 1999
Date Written: 1998
This paper develops a theory of central bank accountability. Two aspects of accountability are considered. The first one is transparency of actual monetary policy, the second aspect is the question of who bears final responsibility for monetary policy. Monetary policy is transparent if there is little uncertainty about the central bankers preferences. Transparency enhances the central bank's accountability. Another way to make the central bank accountable is to shift final responsibility for monetary policy in the direction of the government. This can be achieved by making the cost of overriding the central bank lower. The paper shows that accountability through transparency leads to a lower expected rate of inflation and less stabilization of supply shocks. Accountability through shifting final responsibility in the direction of the government leads to higher inflationary expectations and more stabilization of supply shocks.
JEL Classification: E52, E58
Suggested Citation: Suggested Citation