Central Bank Independence in Transition Economies

Central Bank Independence… 

S&A No. 120 

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Rogoff's analysis of the expected social loss function in this framework reveals 

that the Central Bank which is “conservative” may deliver lower mean and variance of 

inflation but higher variance of output than the Bank which share the same preferences 

as the society. Thus the society expects gains from low and stable inflation and losses 

from distorted responses to productivity shocks. There is a trade off between flexibility 

and credibility of the monetary policy adopted by the Bank. Rogoff shows that the 

optimal “conservatism”, i.e., the weight attached to low inflation, should be large but 

finite

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It is important to note that the Rogoff's analysis is based on the assumption that, 

after nominating the Central Banker, the Government has no influence on monetary 

policy. The Bank chooses both the goals (according to its preferences in the loss 

function) and the instruments (by setting the rate of monetary expansion) of the policy. 

These two prerogatives of the Bank are respectively the goal  independence and  the