Introduction

One of the most challenging tasks in the process of European integration is the creation of new institutions, such as the European Central Bank (ECB). Important and difficult questions need to be addressed in this process, such as: how independent should the European Central Bank be from political institutions? What voting rules should be adopted by the governing board of the ECB, when deciding about European monetary policy? How do we ensure that the preferences of European citizens will be reflected in the choice of policies of the ECB?

The governors of the twelve central banks of the EEC countries have recently proposed a statute for the ECB which provides some answers to these questions. The purpose of this paper is to address these issues and evaluate the proposed statute from the point of view offered by recent politico-economic models of monetary policy. In particular, we focus upon the trade-off between the objectives of low inflation and output stabilization.

We begin by considering, as a benchmark, the situation in which the political integration of Europe has been completed, so that one can think of a ‘European nation’ with its legislature and executive. Following Rogoff (1985), we show that the legislature (universally elected in this new ‘European nation’), has an incentive to set up an independent Central Bank, and to appoint a governor who is more ‘inflation-averse’ than the European median voter.