ON CENTRAL BANK INDEPENDENCE AND THE STABILITY OF POLICY TARGETS

It is argued that impediments to the establishment of an independent c entral bank arise in the presence of unstable policy targets. Changing policy targets may occur with an office-motivated policymaker. This d iffers from politico-economic models where targets change depending on the partisanship of the politicians in office. In the model the princ ipal faces a tradeoff between the credibility benefits of an independe nt central bank and the flexibility to pursue shifts in his policy tar gets allowed by a regime of policy discretion. An empirical section ad dresses the issue of the correlation between central bank independence and the stability of policy targets.