THE TRADE-OFF BETWEEN CENTRAL BANK INDEPENDENCE AND CONSERVATIVENESS

This paper introduces a parameter for central bank independence in a m onetary policy game with a conservative central banker. It tries to ex plain the optimal degree of central bank independence and conservative ness by four economic and political determinants, both theoretically a nd empirically. There appears to be a trade off between central bank i ndependence and conservativeness. Then, by comparing the optimal degre e of conservativeness and independence with the actual degree of indep endence, we want to identify the optimal degree of conservativeness fo r 12 member states of the European Union.