Institutions and Monetary Policy

Central bank independence is a key issue for political and monetary authorities in many countries. In this text, the author looks at the impact of different central banks on price stability and macroeconomic performance, and their optimal degree of legislative independence. After introducing and surveying the rules versus discretion debate in monetary policy, Schaling then investigates the relationship between domestic monetary institutions and macroeconomic performance. The author then compares central bank independence in 12 industrial countries - Australia, Belgium, Canada, the Netherlands, the United Kingdom, the United States, Sweden and Switzerland - and prepares an index of his results. The relationship between central bank independence, inflation and output growth is discussed and a series of propositions tested for the same set of countries over the period from 1972 to 1991. Normative issues are investigated in the later part of the book including the optimal degree of central bank independence in relation to the inflation rate and wage formation in a totally unionized economy.