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Putting Monetary Policy in its Political Place
Published online by Cambridge University Press: 28 October 2002
Abstract
Even though a central bank has formal independence, the success of its actions are part of an interdependent system of policies in which elected governments have a role too. In the making of monetary policy, economists have technical expertise but politicians claim electoral legitimacy. This paper examines monetary policy from the perspective of elected officeholders who must balance non-economic pressures, both domestic and international, against concerns of central bankers with monetary constraint. It emphasizes divisions within national governments about how that balance should be struck, and differences in political priorities for economic policymaking between countries and across time. It concludes with a POP (Politically Optimal Policy), having flexibility between multiple and shifting policy goals rather than fixing on a single target, monetary or non-monetary.
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- © 2002 Cambridge University Press
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