Monetary Policy Capture and Political Stabilization

Abstract

The paper is an extension of the Gabillon and Martimort model (2004), which studies how the independence of the institution in charge of monetary policy may stabilize inflationary fluctuations due to political uncertainty when the economy is characterized by lobbies that seek to promote their own interests to the detriment of the general interests of society. This extension strengthens the hypothesis that the independence of the CB is the best institutional design with which to protect the general interests of ‘society’. In fact, a Central Banker independent from the political principal that appoints it represents the best control by the minority with respect to decisions taken by the elected political majority.