Working Paper: CEPR ID: DP5470
Authors: Andrew Hughes Hallett; Jan Libich
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: accountability; central bank independence; inflation targeting; monitoring; transparency
JEL Codes: C72; E52; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Goal independence (L21) | Goal transparency (L21) |
| Goal independence (L21) | Accountability (M48) |
| Goal transparency (L21) | Goal independence (L21) |
| Goal transparency (L21) | Accountability (M48) |
| Goal transparency (L21) | Inflation (E31) |
| Accountability (M48) | Inflation (E31) |
| Institutional reforms (O17) | Goal transparency (L21) |