DP2354 A Theory of Central Bank Accountability

Author(s): Sylvester C. W. Eijffinger , Marco Hoeberichts , Eric Schaling

Publication Date: January 2000

Keyword(s): Accountability , Central Banks , Monetary Policy , Transparency

JEL(s): E52 , E58

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP2354.asp

In this paper we investigate central bank accountability by looking at the effect of transparency in a simple monetary policy game with an overriding mechanism. Monetary policy is transparent if there is little uncertainty about the central banker's preferences for inflation stabilization relative to output stabilization. Transparency enhances the central bank's accountability. The paper shows that transparency leads to a lower expected rate of inflation and less stabilization of supply shocks.