TY  - JOUR
AU  - Romer, Christina D
AU  - Romer, David H
TI  - Institutions for Monetary Stability
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5557
PY  - 1996
Y2  - May 1996
DO  - 10.3386/w5557
UR  - http://www.nber.org/papers/w5557
L1  - http://www.nber.org/papers/w5557.pdf
N1  - Author contact info:
Christina D. Romer
Department of Economics
University of California, Berkeley
Berkeley, CA 94720-3880
Tel: 510/642-4317
Fax: 510/642-6615
E-Mail: cromer@econ.berkeley.edu

David H. Romer
Department of Economics
University of California, Berkeley
Berkeley, CA 94720-3880
E-Mail: dromer@econ.berkeley.edu
M1  - published as Christina D. Romer, David H. Romer. "Institutions for Monetary Stability," in Christina D. Romer and David H. Romer, Editors, "Reducing Inflation: Motivation and Strategy" University of Chicago Press (1997)

AB  - This paper demonstrates that failures in monetary policy arise not just from dynamic inconsistency, but more importantly, from imperfect understanding of the economy and the effects of policy. Using recent and historic episodes from the United States and abroad, we show that limited knowledge on the part of economists, policymakers, elected leaders, and voters has been an important source of monetary policy mistakes.  We then analyze what institutions of monetary policy could address the problems of both dynamic inconsistency and limited knowledge.  Our analysis suggests that one set of institutions that could do this is a highly independent central bank with discretion about both the goals and the conduct of policy, combined with a two-level structure where elected leaders appoint a board of trustees for the central bank, which in turn selects the actual policymakers.  We conclude by discussing recent and proposed reforms in monetary policy and institutions in industrialized countries in light of this analysis.
ER  -