A. Hughess Hallett
- An Independent Central Bank faced with Elected Governments: A Political Economy Conflict
- European Journal of Political Economy
- Volume | Issue number
- 20 | 4
- Pages (from-to)
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
The literature argues that the benefits of an independent central bank accrue at no cost to the real side. In this paper, we argue that the lack of correlation between monetary autonomy and output variability is due to the proactive role of fiscal policy when faced with rigid monetary objectives. Few of the attempts to measure these correlations actually allow for a changing fiscal role. Yet, when an independent authority handles monetary policy, fiscal and wage/social protection policies remain instruments in the hands of elected governments. We find that, so long as the two authorities pursue their goals independently of each other, a conflict arises that becomes stronger as preferences diverge. We also find that the establishment of a conservative central bank encourages more divergent preferences among the public (as reflected in the government that is elected). The election of more interventionist governments then makes it harder for either authority to reach its own preferred objectives, unless cooperation is possible.
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