Monetary Policy Uncertainty and Central Bank Accountability

There is a considerable academic literature on the relationship between Central Bank independence and inflation but the issue of Central Bank accountability and its effect of inflation performance has received very little attention. This paper looks at the issue of accountability in a simple theoretical model. Defining greater accountability as lower public uncertainty over the Central Bank's preferences, it shows that greater accountability will tend to be associated with improved inflation performance. This follows because, increased uncertainty will cause the public to raise their average inflation expectation, ceteris paribus. This can be thought of as a form of risk premium that the public add to their inflation expectations when they are uncertain about the Central Bank's future actions. Given this result, the paper goes on to establish that a given level of inflation can be achieved by different combinations of accountability and independence. Greater accountability means that the same inflation outcome can be achieved at lower independence. The paper then suggests that this result accounts for the negative correlation between independence and accountability found in Briault, Haldane and King.