Working Paper: CEPR ID: DP1148
Authors: David Currie; Paul Levine; Joseph Pearlman
Abstract: This paper provides a comprehensive assessment of the open economy aspects of the 'delegation game' in which the operation of monetary policy is delegated to independent and `conservative' central bankers with a greater dislike of inflation than the public. When all countries optimally and independently choose the conservatism of their bankers a highly inefficient Nash equilibrium can result. This inefficiency increases as the number of countries increases, the correlation of shocks increases, and if there is unemployment persistence. Delegation can be counterproductive in the sense that the non-cooperative equilibrium of the delegation game results in a lower welfare than that of the representative bankers game.
Keywords: open economy; monetary policy; conservative bankers; delegation game
JEL Codes: E52; E58; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Conservatism of bankers (G21) | Welfare outcomes (I38) |
| Number of countries (O57) | Efficiency of Nash equilibrium (C72) |
| Correlation of economic shocks (F44) | Welfare outcomes (I38) |
| Delegation of monetary policy (E52) | Appointment of less conservative bankers (G28) |
| High correlation of shocks (C10) | Social desirability of anticonservative bankers (G28) |
| Non-Ricardian effects (E19) | Influence on welfare outcomes (I38) |
| Unemployment persistence (J64) | Influence on welfare outcomes (I38) |
| Cooperative delegation (C71) | Welfare gains (D69) |