We test some positive implications of the commitment hypothesis for the design of monetary institutions in open economies, by studying the determinants of Central Bank independence on a sample of 55 countries, for the period 1980-1989. We document fairly consistent empirical evidence in support of the hypothesis that strategic commitment is indeed important to understand cross-country variation in the level of Central Bank degree of dependence. We also address the related question why only highly industrialized countries have relied on such a solution to the inflationary bias of monetary policy whereas other countries have not. Data suggest that the answer is related to the presence and the size of world-wide common features in the business cycle at country level. Copyright © 2007 John Wiley & Sons, Ltd.

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In a stochastic two-period OLG model, featuring an aggregate shock to the economy, ex-ante optimality\ud requires intergenerational risk sharing. We compare the level of intergenerational risk sharing chosen by a\ud benevolent government and by an office-seeking politician. In our political system, the transfer of resources\ud across generations is determined as a Markov equilibrium of a probabilistic voting game. Low realized\ud returns on the risky asset induce politicians to compensate the old through a PAYG system. This political\ud system typically generates an intergenerational risk sharing scheme that is (i) larger, (ii) more persistent,\ud and (iii) less responsive to the realization of the shock than the social optimum. This is because the current\ud politician anticipates her transfers to the elderly to be compensated by future politicians through offsetting\ud transfers, and hence overspends

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