Crucial Issues Concerning Central Bank Independence

25 Pages Posted: 4 Aug 2000

See all articles by Bennett T. McCallum

Bennett T. McCallum

Carnegie Mellon University - David A. Tepper School of Business; National Bureau of Economic Research (NBER)

Date Written: May 1996

Abstract

This paper argues, first, that it is inappropriate to presume that central banks will, in the absence of any tangible precommitment technology, inevitably behave in a `discretionary' fashion that implies an inflationary bias. Furthermore, there is no necessary tradeoff between `flexibility and commitment.' Second, to the extent that the absence of any precommitment technology is nevertheless a problem, it will apply to a consolidated central bank-plus-government entity as well as to the central bank alone. Thus contracts between governments and central banks do not overcome the motivation for dynamic inconsistency, they merely relocate it. Several implications are discussed.

Suggested Citation

McCallum, Bennett T., Crucial Issues Concerning Central Bank Independence (May 1996). NBER Working Paper No. w5597, Available at SSRN: https://ssrn.com/abstract=225539

Bennett T. McCallum (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

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