Central Bank Independence in Transition Economies

1.4. Reducing Inflationary Bias — Conservative Central Banker 

1.4.1. Rogoff's (1985) Model 

Another approach to the time consistency problem is presented by Rogoff 

(1985). He analyses a delegation of the monetary policy to the “conservative” Central 

Banker who attaches a greater weight to inflation stabilisation than the society. The 

structure of the Rogoff (1985) model is slightly more complicated than the Barro and 

Gordon (1983a) framework. The following presentation draws on Schaling (1995). 

The society loss function is the same as in the basic model, i.e., given by 

equation (2). The Central Banker's loss function is as in equation (2) but with a lower 

weight placed on output stabilisation (second term in equation). In addition, the 

Phillips curve relationship is subject to productivity shocks which are normally 

distributed with zero mean. The sequence on the games is as follows. First, people set 

their inflationary expectations and sign nominal wages. Then the productivity shock 

realises. The Central Bank observe the shock and set monetary policy. At the last stage 

unemployment is determined. The inflation rate and unemployment are determined by 

the minimisation of the Central Bank loss function subject to the Phillips curve and 

private agents' expectations. If the Central Banker has the same preferences as the 

society, there is an inflationary bias like in the Barro and Gordon model. The expected 

inflation rate, however, is not equal to the actual inflation because Central Bank reacts 

to the productivity shocks which are not observable when people set their 

expectations. Expected output deviations from the natural level are zero and actual 

output deviations are less than the supply shock because of the stabilisation policy of 

the Bank.  

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