Central Bank Independence, Accountability and Transparency: Complements or Strategic Substitutes?

42 Pages Posted: 3 May 2006

See all articles by Andrew J. Hughes

Andrew J. Hughes

Cardiff Business School; Centre for Economic Policy Research (CEPR); Vanderbilt University - College of Arts and Science - Department of Economics

Jan Libich

La Trobe University - Business School

Date Written: January 2006

Abstract

The paper incorporates three institutional design features into a Kydland-Prescott, Barro-Gordon monetary policy game. It shows that goal-independence and goal-transparency (an explicit inflation target) at the central bank are substitute 'commitment technologies' that reduce inflation and build credibility. In addition, goal-transparency is shown to be socially superior as it also lowers public's monitoring cost. Nevertheless, independent central bankers are less likely to embrace it if they perceive public scrutiny (accountability) as intrusive. Combining these findings implies that both goal-transparency and accountability will be negatively related to goal-independence for which we present empirical support using established indices. Our analysis further suggests that, to avoid an inferior equilibrium with opaque objectives and a 'democratic deficit', institutional reforms should follow the Bank of England scenario, in which an explicit inflation target is first legislated and only then instrument (but not goal) independence granted.

Keywords: Inflation targeting, central bank independence, transparency, accountability, monitoring

JEL Classification: C72, E52, E61

Suggested Citation

Hughes Hallett, Andrew J. and Libich, Jan, Central Bank Independence, Accountability and Transparency: Complements or Strategic Substitutes? (January 2006). CEPR Discussion Paper No. 5470, Available at SSRN: https://ssrn.com/abstract=900408

Andrew J. Hughes Hallett (Contact Author)

Cardiff Business School ( email )

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Centre for Economic Policy Research (CEPR)

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Vanderbilt University - College of Arts and Science - Department of Economics ( email )

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Jan Libich

La Trobe University - Business School ( email )

La Trobe University
Bundoora, Victoria, Victoria 3083
Australia

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