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Please use this identifier to cite or link to this item: http://purl.umn.edu/44297

Title: Central Bank Independence, Democracy, and Dollarization
Authors: Drazen, Allan
Keywords: central bank independence
constitutional democracy
democratic control
JEL Codes: E52
E58
H62
Issue Date: 2002-05
Abstract: Is there a fundamental conflict between insulating monetary policy from popular pressures, seen as essential to sound monetary policy, and making policy responsive to the popular will, seen as fundamental to democracy? We argue that strongly independent monetary policy is not inconsistent with democratic control of policymaking, once one realizes that a key feature of democratic policymaking is the decision to remove some decisions from “day-to-day” political pressures. This is the essence of "constitutionalism," central to the functioning of democracy, by which certain decisions are made difficult to reverse. It is further argued that a conflict between popular sovereignty and policymaker independence is not unique to monetary policy, but actually characterizes most policymaking in a democracy, with institutions designed to insulate policymaking from popular pressures. A constitutional perspective implies that extreme forms of commitment, such as a dollarization, are similarly consistent with democracy. One argument for such constraints on monetary policy (as opposed to fiscal policy, for example) is agreement on what good monetary policy means.
URI: http://purl.umn.edu/44297
Identifiers: Print ISSN 1514-0326
Online ISSN 1667-6726
Institution/Association: Journal of Applied Economics>Volume 5, Number 1, May 2002
Total Pages: 17
From Page: 1
To Page: 17
Collections:Volume 05, Number 1, May 2002

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