Central Bank or Single Authority? Political Cycle, Monetary Policy and Financial Supervision
39 Pages Posted: 29 Sep 2005
The aim of this paper is to present a principal-and-two-agents model, by which to assess the role of the political cycle in determining the design of the institutions of monetary and of regulatory policy. In particular the specific issue is: should the responsibility of the two policies be concentrated in the hands of the central bank or not? In examining the policymaker's choice between single and multiple authority, two phases are identified, the electoral and non-electoral periods. The conclusion reached is that the electoral cycle is irrelevant, while what is relevant are the costs of "capture" involved in the different institutional scenarios.
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