Bank Bailouts and Redistributive Monetary Policy : Voting on Central Bank Independence

In this paper bank bailout rules and central bank independence (CBI) are determined by majority voting. The failure of a bank is socially costly, since bailouts are financed by distortionary taxation. The tax distortion can be reduced via monetization, i.e. lowering CBI; but monetization causes in flation. There is a socially optimal level of bailout and CBI, which solves the trade-off between monetary stability and banking stability. This level, however, is rarely adopted. Since individuals have heterogeneous portfolios, the bailout and the central bank' s policy have redistributive consequences. Thus the preferences for monetary stability and banking stability are different across individuals. The actual level of CBI that a society will choose is determined by how public debt and bank ownership are distributed in individuals ' portfolios