POLITICAL CONSENSUS, UNCERTAIN PREFERENCES, AND CENTRAL BANK INDEPENDENCE

Models where monetary policy is delegated to an independent central ba nk using contracts or targets usually assume that the preferences of t he principal and the agent are known with certainty. However, if there is no consensus in society about the relative costs of inflation and output stabilisation, the delegation solution may not produce a better outcome for the median voter than discretion. This paper examines the robustness of the institutional solutions to the credibility problem with uncertain preferences. We also examine the related issue of wheth er political parties have an interest in moving towards central bank i ndependence.