Rogoff’s Central Banker

Rogoff (1985) produced a paper, which attempted to resolve the problem of time

inconsistency. He demonstrated that increases in the social loss function due to

deviations of output and inflation from their optimal levels could be reduced if

policy – making was delegated to a body which was more inflation averse that

the majority of the public.
 
 
 

This body would weight inflation deviations more heavily than the social welfare

function. Rogoff called this distinct authority the conservative banker.

Under this model the conservative banker trades off some loss in flexibility for

some gain in credibility. The model shows that there will be an increase in the

overall social welfare in which inflation is on average lower and more stable but

with a less variable output. The Rogoff rule provides a model where the central

bank has almost total goal and instrument independence and very little

accountability.

In the real world, the German Bundesbank provides the closest example to this

conservative central banker.