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Monetary policy institutions

Monetary policy institutions

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Published by Venkatesh Swamy


Monetary policy institutions

GSF, Chapter 7

2

Central bank independence

Understanding how monetary policy institutions operate is critical.

Why? The policymaking process involves interactions between different sectors of the government and economic agents in the wider economy.

In that context issues like the independence of central banks play a prominent role.

Important the


Monetary policy institutions

GSF, Chapter 7

2

Central bank independence

Understanding how monetary policy institutions operate is critical.

Why? The policymaking process involves interactions between different sectors of the government and economic agents in the wider economy.

In that context issues like the independence of central banks play a prominent role.

Important the

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Published by: Venkatesh Swamy on Dec 22, 2009
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03/30/2010

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KINGSTON UNIVERSITY, LONDONSCHOOL OF ECONOMICSMonetary Economics in Developing Countries(FE3178), 2009-2010
Monetary policy institutions
GSF, Chapter 7
1
 
Central bank independence
Understanding how monetary policy institutions operateis critical.Why? The policymaking process involves interactions between different sectors of the government andeconomic agents in the wider economy.In that context issues like the independence of central banks play a prominent role.Important theoretical contributions like Kydland andPrescott’s 1977 seminal work generating the rules-versus-discretion debate.See also Barro and Gordon (1983).
2
 
That literature conjectures that policymakers (e.g. central bankers) will have a temptation to follow inflationary policies in pursuing a higher level of output.But assuming
rational expectations
implies that such a behaviour only leads to an inefficiently higher level of inflation (an
‘inflation bias’
) without correspondingoutput gains.That result connects to central bank independence via theinfluence of political factors in determining policychoices.Related works: Rogoff (1985) and Walsh (1995).
3

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