Constitutions and Central-Bank Independence: An Objection to 'Mccallum's Second Fallacy'

Stockholm School of Econ./EFI Working Paper No. 426

18 Pages Posted: 7 May 2001

See all articles by Paolo Giordani

Paolo Giordani

Norwegian Business School

Giancarlo Spagnolo

Stockholm School of Economics (SITE); Centre for Economic Policy Research (CEPR); University of Rome 'Tor Vergata'; EIEF

Date Written: March 2001

Abstract

Most of the literature on monetary policy delegation assumes that the government can credibly commit to the delegation contract, an assumption criticized by McCallum. This paper provides some foundations for the assumption that renegotiating a delegation contract can be costly by illustrating how political institutions can generate inertia in recontracting, reduce the gains from it or prevent it altogether. Once the nature of renegotiation costs has been clarified, it is easier to see why certain institutions can mitigate or solve dynamic inconsistencies better than others. The paper points to institutions which give Western democracies the technology to make credible delegation commitments, and argues that the ECB is an example of credible delegation.

Keywords: constitution, delegation, inertia, renegotiation costs, separation of powers

JEL Classification: E58, E61

Suggested Citation

Giordani, Paolo and Spagnolo, Giancarlo, Constitutions and Central-Bank Independence: An Objection to 'Mccallum's Second Fallacy' (March 2001). Stockholm School of Econ./EFI Working Paper No. 426, Available at SSRN: https://ssrn.com/abstract=263294 or http://dx.doi.org/10.2139/ssrn.263294

Paolo Giordani (Contact Author)

Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Giancarlo Spagnolo

Stockholm School of Economics (SITE) ( email )

P.O. Box 6501
Stockholm
Sweden

HOME PAGE: http://https://sites.google.com/site/giancarlospagnoloshomepage/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

University of Rome 'Tor Vergata' ( email )

Faculty of Economics - DEI
Via Columbia 2
Rome, RM 00133
Italy

EIEF ( email )

Via Due Macelli, 73
Rome, 00187
Italy

HOME PAGE: http://WWW.EIEF.IT

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
288
Abstract Views
2,366
rank
119,499
PlumX Metrics