The ultimate determinants of central bank independence



11

th that8)

,.       [(1   β)2 + χ]3u2 г l./     (1   β)2uu2  and

F(0) = jʌ___—__—__, lim F(ε) = 2___an__ and

σ⅛1 -β )4     i                σj

(1 )2u2 < F(ε) < [(1 )2÷χ]3u2
σ2                   σ2μ(1 -β )4

We are now ready to prove:

PROPOSITION 3.2: (1 ~β)2u2 ɛ*[(1 ~β)2 + χ]3u2
σ2                    σ(1 -β )4

Proof: The left-hand side of (3.8) is a 45-degree straight line through the origin. Since

F(0) = [(1 β) + χ] u and dF < 0, these two functions must intersect at one and only
σ2μ(1 )4          əɛ

one point. Moreover, since

u (1 ~β) < F(ε) < [(1 ~β) ] u , the intersection occurs at a

σ2μ                    σ22(1 -β )4

value of ɛ that is bounded between (1 β ) u and [(1 β) ] u
σ2            σμ(1 -β )4

Figure 3.1 illustrates the argument graphically. Clearly, a solution for ɛ exists and is
unique.

8) These statements are demonstrated in Appendix B to this paper.



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