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Two fallacies concerning central bank independence

Author: Bennett T McCallum; National Bureau of Economic Research.
Publisher: Cambridge, MA. : National Bureau of Economic Research, ©1995.
Series: Working paper series (National Bureau of Economic Research), working paper no. 5075.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
Abstract: This paper takes issue with two basic conclusions prevalent in the literature on central bank behavior. First, the paper argues that it is inappropriate to presume that central banks will, in the absence of any precommitment technology, necessarily behave in a 'discretionary' fashion that implies an inflationary bias. Since there is no functional connection between average rates of money creation (or  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Bennett T McCallum; National Bureau of Economic Research.
OCLC Number: 51279438
Notes: "March 1995."
Description: 1 online resource (13 pages).
Series Title: Working paper series (National Bureau of Economic Research), working paper no. 5075.
Responsibility: Bennett T. McCallum.

Abstract:

Abstract: This paper takes issue with two basic conclusions prevalent in the literature on central bank behavior. First, the paper argues that it is inappropriate to presume that central banks will, in the absence of any precommitment technology, necessarily behave in a 'discretionary' fashion that implies an inflationary bias. Since there is no functional connection between average rates of money creation (or inflation) and policy responsiveness to cyclical disturbances, it is entirely feasible for the bias to be avoided. In other words, there is no necessary tradeoff between 'flexibility and commitment.' Second, to the extent that the absence of any absolute precommitment technology is nevertheless a problem, it will apply to a consolidated central bank plus government entity as well as to the central bank alone. Thus contracts between governments and central banks do not overcome the motivation for dynamic inconsistency, they merely relocate it.

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