Political Consensus, Uncertain Preferences, and Central Bank Independence.

Abstract

Models where monetary policy is delegated to an independent central bank using contracts or targets usually assume that the preferences of the principal and the agent are known with certainty. However, if there is no consensus in society about the relative costs of inflation and output stabilization, the delegation solution may not produce a better outcome for the median voter than discretion. This paper examines the robustness of the institutional solutions to the credibility problem with uncertain preferences. The author also examines the related issue of whether political parties have an interest in moving towards central bank independence. Copyright 1998 by Royal Economic Society.