The Politics of Monetary Policy

In this paper we critically review the literature on the political economy of monetary policy emphasizing the questions opened by the recent …nancial crisis. We begin with a discussion of the issue of rules versus discretion. We then examine the independence of Central banks both in normal times and in crisis and in relation to the political cycles. Finally we address international institutional issues concerning the feasibility, optimality and political sustainabilty of currency unions in which more than one country share the same currency. A brief review of the Euro experience concludes the paper.