The design of monetary institutions

Monetary institutions differ considerably between the main industrial countries. Differences in preferences, labor market characteristics, political stability and the structure of the economy make that different countries have different needs. These different needs are also reflected in the design of monetary institutions or, more specifically, central banks. This book takes a political economy view on monetary policy making. Our starting point is that the central bank and rational agents in the private economy interact strategically. The central bank sets monetary policy (usually the rate of inflation) and the private agents rationally form expectations about the rate of inflation. The monetary policy maker has an information advantage about the state of the economy and in the last part of this book also about its own preferences. Using this simple game-theoretic framework, we analyze the effects of different institutional set-ups on macroeconomic policy outcomes.