Date of Original Version

6-2005

Type

Working Paper

Rights Management

All Rights Reserved

Abstract or Description

At a conference held by the Bank of Japan, with the topic of “incentive mechanisms for economic policymakers,” it is natural to focus on incentives involving central banks. There are two levels at which central bank incentives could be considered, the private level and the social level. The former focuses on the self-interest of the central-bank institution or even the personal objectives of individuals in the central bank. This level is important because actual policy decisions are made by purposeful individuals or groups of individuals whose actions are strongly influenced by matters affecting their own income, prestige, working conditions, etc. It seems clear that a full understanding of policy behavior requires some attention to incentives at this level. But it also seems clear that a truly satisfactory analysis of the implied type would be extremely difficult, for policy-makers’ objectives are in significant part concerned with attainment and retention of policy positions, the determination of which is part of a nation’s political process. Adequate treatment of this aspect of behavior therefore requires an adequate model of the political system, including voter behavior. And despite many admirable efforts and considerable progress, the profession is still a long way from having a widely-accepted model of that type.

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