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Federal Reserve Bank of St. Louis
Working Papers
Central bank design in general equilibrium
James B. Bullard
Christopher J. Waller

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.

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James B. Bullard & Christopher J. Waller, Central bank design in general equilibrium, Federal Reserve Bank of St. Louis, Working Papers 1998-002, 2002.
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Keywords: Monetary theory ; Banks and banking; Central
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