TY  - JOUR
AU  - McCallum,Bennett T.
TI  - Two Fallacies Concerning Central Bank Independence
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5075
PY  - 1995
Y2  - July 1995
UR  - http://www.nber.org/papers/w5075
L1  - http://www.nber.org/papers/w5075.pdf
N1  - Author contact info:
Bennett T. McCallum
Tepper School of Business, Posner 256
Carnegie Mellon University
Pittsburgh, PA 15213
Tel: 412/268-2347
Fax: 412/268-6830
E-Mail: bm05@andrew.cmu.edu
AB  - This paper takes issue with two basic conclusions prevalent in the literature on central bank behavior.  First, the paper argues that it is inappropriate to presume that central banks will, in the absence of any precommitment technology, necessarily behave in a 'discretionary' fashion that implies an inflationary bias.  Since there is no functional connection between average rates of money creation (or inflation) and policy responsiveness to cyclical disturbances, it is entirely feasible for the bias to be avoided.  In other words, there is no necessary tradeoff between 'flexibility and commitment.'  Second, to the extent that the absence of any absolute precommitment technology is nevertheless a problem, it will apply to a consolidated central bank plus government entity as well as to the central bank alone.  Thus contracts between governments and central banks do not overcome the motivation for dynamic inconsistency, they merely relocate it.
ER  -