This paper presents an interest group theory of central bank independence. The theory is grounded in the concept of rent extraction. In the absence of an independent central bank, politicians can benefit in the short run by creating an unanticipated burst of inflation that unravels many interest...

This paper considers a central puzzle of central bank independence: why politicians would agree to establish such a bank, when the consequence is giving up a substantial degree of control over the money supply and price levels. I suggest that politicians agree to establish independent central...