Working Paper
Central bank design in general equilibrium
Abstract: We study the effects of alternative institutional arrangements for the determination of monetary policy in the context of a capital-theoretic, general equilibrium economy. In the absence of an institutional arrangement, there is a continuum of steady state equilibria indexed by rates of inflation ranging from the Friedman rule to high a high level. The social optimum is associated with the Friedman rule.. We consider three institutional arrangements for determining monetary policy. The first, unconditional majority voting, always leads to a substantial inflation bias. The second, a simple form of bargaining which we interpret as a policy board, generally improves on the unconditional majority voting outcome. Finally, we consider a form of constitutional rule which always achieves the social optimum.
https://doi.org/10.20955/wp.1998.002
Status: Published in Journal of Money, Credit, and Banking, February 2004, 36(1), pp. 95-113
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Bibliographic Information
Provider: Federal Reserve Bank of St. Louis
Part of Series: Working Papers
Publication Date: 2002
Number: 1998-002