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CENTRAL BANKING AS A POLITICAL PRINCIPAL‐AGENT PROBLEM
Author(s) -
FRATIANNI MICHELE,
HAGEN JÜRGEN VON,
WALLER CHRISTOPHER
Publication year - 1997
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1997.tb01917.x
Subject(s) - principal–agent problem , agency (philosophy) , independence (probability theory) , politics , economics , principal (computer security) , central bank , work (physics) , inflation targeting , agency cost , inflation (cosmology) , monetary economics , political economy , microeconomics , monetary policy , finance , political science , sociology , law , corporate governance , mechanical engineering , social science , statistics , physics , mathematics , theoretical physics , computer science , shareholder , engineering , operating system
Due to their ties with elected leaders, central bankers may pursue policies that are not in society's best interests. Consequently, the relationship between the public and the central bank can be characterized as a principal‐agent problem. An inflation and stabilization bias arise as a result of this agency problem and the magnitudes of these biases depend on the political environment. Various institutional proposals for eliminating these biases are examined, and we find that central bank independence and performance contracts work best. However, we argue that central bank independence is preferable for resolving the agency problem.