Independent Monetary Policies and Social Equality

Abstract

The problem of monetary policy delegation is formulated as a two-stage game between the government and the central bank. In the first stage the government chooses the institutional design of the central bank. Monetary and fiscal policy are implemented in the second stage. When fiscal policy has a social equality component, there is a natural conflict between optimally configured monetary policies and equality. As a result, governments interested in social redistribution, when faced with an independent central bank, will have an incentive to limit their use of fiscal policy.