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    Delegation of monetary policy: more than a relocation of the time-inconsistency problem

    Driffill, John and Rotondi, Z. (2003) Delegation of monetary policy: more than a relocation of the time-inconsistency problem. Working Paper. Birkbeck, University of London, London, UK.

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    It has been argued that delegation of monetary policy to an independent central bank, which acts as an agent for the government, does not mitigate the problem of time-inconsistency, but merely relocates it. We argue here that this is not so, and that delegation enables a wider class of economies to sustain zero inflation than would be able to do so in its absence. We consider an economy in which the government faces re-appointment costs, that is, costs associated with sacking one central banker and replacing them with another, costs which are intended to protect central bank independence. We show that, by means of suitable announcements of incentive schemes for the central bank, combined with appropriate actually implemented schemes, delegated policy enables zero inflation to prevail in economies in which it could not do so without delegated policy. These economies are ones that have relatively high discount rates (and so low discount factors).


    Item Type: Monograph (Working Paper)
    Additional Information: BWPEF 0302
    Keyword(s) / Subject(s): credibility, delegation, time-inconsistency, independent central banks, monetary policy
    School: Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School
    Depositing User: Administrator
    Date Deposited: 09 Apr 2019 13:29
    Last Modified: 02 Aug 2023 17:50


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