A Political Agency Theory of Central Bank Independence

47 Pages Posted: 30 Jan 2006

See all articles by Gauti B. Eggertsson

Gauti B. Eggertsson

Federal Reserve Bank of New York

Eric Le Borgne

International Monetary Fund (IMF)

Date Written: July 2003

Abstract

We propose a theory to explain why, and under what circumstances, a politician gives up rent and delegates policy tasks to an independent agency. We apply this theory to monetary policy by extending a standard dynamic New-Keynesian stochastic general equilibrium model. This model gives a new theory of central bank independence that is unrelated to the standard inflation bias problem. We derive several new predictions and show that they are consistent with the data. Finally, we show that while instrument independence of the central bank is desirable, goal independence is not.

Keywords: Central Bank Independece, Career Concerns, Elections, Experimetation

JEL Classification: E58, E61, H11, J45

Suggested Citation

Eggertsson, Gauti B. and Le Borgne, Eric, A Political Agency Theory of Central Bank Independence (July 2003). IMF Working Paper No. 03/144, Available at SSRN: https://ssrn.com/abstract=879220

Gauti B. Eggertsson (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Eric Le Borgne

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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