The choice of 'conservative' bankers in open economies: Monetary regime options for Europe.

That governments should delegate the operation of monetary policy to independent central banks is widely advocated. For a closed economy the optimal choice results in a banker who is more conservative than the representative government, assigning a lower weight on output in her welfare function, but not over-conservative, thereby allowing monetary policy to adjust to shocks. However, for open economies the exchange rate externality results in an inefficient Nash equilibrium to this 'delegation game'. Monetary union or cooperation in the optimal choice of banker can internalise the externality. These options are assessed under symmetric and asymmetric shocks assuming different levels of fiscal transfers.