Abstract

This paper surveys the state of the art on monetary policy and central bank behaviour from a public choice perspective. After a brief look at the roots of today's view of monetary policy conduct and institutional design in early work on political business cycles, the inflation-stabilisation dilemma is discussed along with proposed solutions in the form of central bank independence and conservativeness, incentive contracts, and inflation targets. The final section turns to current developments, including the proper choice of policy targets, the role of New Keynesian aggregate-supply curves and the quest for monetary policy rules triggered by the Taylor rule.

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