IDEAS home Printed from https://ideas.repec.org/p/cmf/wpaper/wp1999_9902.html
   My bibliography  Save this paper

Is it Welfare Improving to Insulate Monetary Policy from the Political Arena?

Author

Listed:
  • Juan Carlos Berganza

Abstract

This paper presents a two-party model in which partisan and opportunistic politicians have two options: (i) to reach an agreement with respect to the central banker before elections are held, which leads to elections becoming a toss up, or (ii) to let the citizens vote for their proposed central bankers, which endogenizes the probabilities of being elected. Parties want to appoint their ideal central bankers (partisan), they care about winning the elections (opportunistic), and they are risk-averse about the electoral results. The paper shows that, under some circunstances, both parties may be interested in leaving the appointment of the central banker out of the electoral contest. The party with higher a priori electoral prospects would be willing to reduce its probability of winning the elections after an agreement if the appointed central banker is close to its preferences and/or it is very worried about the consequences of the other party's victory. The party with poorer electoral prospects may agree on a less preferred central banker if this increases its probability of winning. It is also shown that an agreement in which both parties improve their welfare may be bad for some voters.

Suggested Citation

  • Juan Carlos Berganza, 1999. "Is it Welfare Improving to Insulate Monetary Policy from the Political Arena?," Working Papers wp1999_9902, CEMFI.
    • Handle: RePEc:cmf:wpaper:wp1999_9902
    as

    Download full text from publisher

    File URL: https://www.cemfi.es/ftp/wp/9902.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    2. Waller, Christopher J, 1989. "Monetary Policy Games and Central Bank Politics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(4), pages 422-431, November.
    3. Milesi-Ferretti, Gian Maria, 1995. "The Disadvantage of Tying Their Hands: On the Political Economy of Policy Commitments," Economic Journal, Royal Economic Society, vol. 105(433), pages 1381-1402, November.
    4. Cukierman Alex, 1992. "CENTRAL BANK STRATEGY, CREDIBILITY, AND INDEPENDANCE: THEORY AND EVIDENCE: Compte Rendu par Dominique Cariofillo," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 3(4), pages 581-590, December.
    5. Kenneth Rogoff & Anne Sibert, 1988. "Elections and Macroeconomic Policy Cycles," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(1), pages 1-16.
    6. Alberto Alesina, 1987. "Macroeconomic Policy in a Two-Party System as a Repeated Game," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(3), pages 651-678.
    7. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, April.
    8. Cukierman, Alex & Meltzer, Allan H, 1986. "A Positive Theory of Discretionary Policy, the Cost of Democratic Government and the Benefits of a Constitution," Economic Inquiry, Western Economic Association International, vol. 24(3), pages 367-388, July.
    9. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-167, March.
    10. Juan Carlos Berganza, 1997. "Does an Independent and Conservative Central Bank Always Reduce Inflation?," Working Papers wp1997_9703, CEMFI.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Persson, Torsten & Tabellini, Guido, 1999. "Political economics and macroeconomic policy," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 22, pages 1397-1482, Elsevier.
    2. Eric Dubois, 2016. "Political Business Cycles 40 Years after Nordhaus," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01291401, HAL.
    3. Price, Simon, 1997. "Political Business Cycles and Macroeconomic Credibility: A Survey," Public Choice, Springer, vol. 92(3-4), pages 407-427, September.
    4. Eric Dubois, 2016. "Political business cycles 40 years after Nordhaus," Public Choice, Springer, vol. 166(1), pages 235-259, January.
    5. Alesina, Alberto & Stella, Andrea, 2010. "The Politics of Monetary Policy," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 18, pages 1001-1054, Elsevier.
    6. Kenneth Scheve, 2003. "Public demand for low inflation," Bank of England working papers 172, Bank of England.
    7. Eric Dubois, 2016. "Political Business Cycles 40 Years after Nordhaus," Post-Print hal-01291401, HAL.
    8. Lohmann, Susanne, 1997. "Partisan control of the money supply and decentralized appointment powers," European Journal of Political Economy, Elsevier, vol. 13(2), pages 225-246, May.
    9. Cleomar Gomes da silva & Flavio V. Vieira, 2016. "Monetary policy decision making: the role of ideology, institutions and central bank independence," Economics Bulletin, AccessEcon, vol. 36(4), pages 2051-2062.
    10. Berthold Herrendorf & Manfred J.M. Neumann, 2003. "The Political Economy of Inflation, Labour Market Distortions and Central Bank Independence," Economic Journal, Royal Economic Society, vol. 113(484), pages 43-64, January.
    11. Donato Masciandaro & Davide Romelli, 2019. "Behavioral Monetary Policymaking: Economics, Political Economy and Psychology," World Scientific Book Chapters, in: Behavioral Finance The Coming of Age, chapter 9, pages 285-329, World Scientific Publishing Co. Pte. Ltd..
    12. Masciandaro, Donato & Romelli, Davide, 2015. "Ups and downs of central bank independence from the Great Inflation to the Great Recession: theory, institutions and empirics," Financial History Review, Cambridge University Press, vol. 22(3), pages 259-289, December.
    13. Brian Snowdon & Howard R. Vane, 1999. "The New Political Macroeconomics: An Interview with Alberto Alesina," The American Economist, Sage Publications, vol. 43(1), pages 19-34, March.
    14. Berthold Herrendorf & Manfred Neumann, 2000. "A nonnormative theory of inflation and central bank independence," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 136(2), pages 315-333, June.
    15. Chortareas, Georgios E & Miller, Stephen M, 2003. "Central Banker Contracts, Incomplete Information, and Monetary Policy Surprises: In Search of a Selfish Central Banker?," Public Choice, Springer, vol. 116(3-4), pages 271-295, September.
    16. Patrick Artus, 1995. "Effets internes et internationaux de l'indépendance des banques centrales," Revue Économique, Programme National Persée, vol. 46(3), pages 857-867.
    17. Donato Masciandaro & Davide Romelli, 2018. "To Be or not to Be a Euro Country? The Behavioural Political Economics of Currency Unions," BAFFI CAREFIN Working Papers 1883, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    18. Francesca Castellani & Xavier Debrun, 2005. "Designing Macroeconomic Frameworks: A Positive Analysis of Monetary and Fiscal Delegation," International Finance, Wiley Blackwell, vol. 8(1), pages 87-117, March.
    19. Crowe, Christopher & Meade, Ellen E., 2008. "Central bank independence and transparency: Evolution and effectiveness," European Journal of Political Economy, Elsevier, vol. 24(4), pages 763-777, December.
    20. Juan Carlos Berganza, 1998. "Relationships Between Politicians and Voters Through Elections: A Review Essay," Working Papers wp1998_9809, CEMFI.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cmf:wpaper:wp1999_9902. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Araceli Requerey (email available below). General contact details of provider: https://edirc.repec.org/data/cemfies.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.