Median Voter Preferences, Central Bank Independence and Conservatism.

Abstract

This paper studies how the independence and the conservatism of a central bank relate to the structure and stability of the median voter preferences. This is done by means of a model of endogenous delegation where an opportunistic policy maker chooses the monetary regime (independence and conservatism) to maximise the welfare of the median voter. The results show that a high degree of inflation aversion of monetary policy is not necessarily associated with a high degree of central bank independence. A high and stable degree of inflation aversion of society (i.e. of the median voter) may lead to establish a dependent central bank that is highly inflation averse. This suggests that the negative correlation between inflation and central bank independence indices detected by several empirical studies may reflect a link between inflation and some deep features of social preferences. Copyright 2000 by Kluwer Academic Publishers