On The Sources Of The Inflation Bias And Output Variability
AbstractWhy do dynamic inconsistencies in monetary policy exist? In this paper, a traditional model with output inefficiencies is introduced, but monetary policy is allowed to be influenced by the various constituencies in the economy that pressure Congress in turn to pressure the Central Bank to adopt a particular policy stance. This paper shows that in this economy an inflation bias arises because of the lobbying pressures of outsiders. Furthermore, it shows that if lobbying pressures are high enough, an inflation bias cannot be avoided for any finite level of Central Bank independence. It also shows that introducing the realistic feature of lobbying pressures has an impact on the stabilization properties of monetary policy. When a supply shock occurs, the shock is totally absorbed by a non-myopic trade union, which has no lobbying costs. This is independent of any finite degree of conservativeness of the central banker, who has to accept an extreme increase in price instability. It is shown that monetary policy delegation is therefore sub-optimal in achieving price stability compared with labor-market reforms meant to remove monopsonistic elements. However, the same structural policies will induce greater output instability by strengthening the power of conservative central bankers. Copyright (c) Scottish Economic Society 2005.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Scottish Economic Society in its journal Scottish Journal of Political Economy.
Volume (Year): 52 (2005)
Issue (Month): 4 (09)
Contact details of provider:
Web page: http://www.blackwellpublishing.com/journal.asp?ref=0036-9292
More information through EDIRC
Other versions of this item:
- Gustavo Piga, 2005. "On the Sources of the Inflation Bias and Output Variability," CEIS Research Paper, Tor Vergata University, CEIS 66, Tor Vergata University, CEIS.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Adam S. Posen, 1995. "Declarations Are Not Enough: Financial Sector Sources of Central Bank Independence," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 253-274 National Bureau of Economic Research, Inc.
- McCallum, Bennett T., 1997.
"Crucial issues concerning central bank independence,"
Journal of Monetary Economics, Elsevier,
Elsevier, vol. 39(1), pages 99-112, June.
- Bennett T. McCallum, 1996. "Crucial Issues Concerning Central Bank Independence," NBER Working Papers 5597, National Bureau of Economic Research, Inc.
- Grier, Kevin B., 1991. "Congressional influence on U.S. monetary policy : An empirical test," Journal of Monetary Economics, Elsevier, Elsevier, vol. 28(2), pages 201-220, October.
- Herrendorf, Berthold & Neumann, Manfred J.M., 1998. "The Political Economy of Inflation and Central Bank Independence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1787, C.E.P.R. Discussion Papers.
- David D. VanHoose & Christopher J. Waller, 1989.
"Discretionary monetary policy and socially efficient wage indexation,"
Research Working Paper, Federal Reserve Bank of Kansas City
89-13, Federal Reserve Bank of Kansas City.
- Waller, Christopher J & VanHoose, David D, 1992. "Discretionary Monetary Policy and Socially Efficient Wage Indexation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(4), pages 1451-60, November.
- Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, American Economic Association, vol. 85(1), pages 150-67, March.
- Fratianni, Michele & von Hagen, Jurgen & Waller, Christopher J, 1997.
"Central Banking as a Political Principal-Agent Problem,"
Economic Inquiry, Western Economic Association International,
Western Economic Association International, vol. 35(2), pages 378-93, April.
- Fratianni, Michele & von Hagen, Jürgen & Waller, Christopher, 1993. "Central Banking as a Political Principal-Agent Problem," CEPR Discussion Papers, C.E.P.R. Discussion Papers 752, C.E.P.R. Discussion Papers.
- Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, American Economic Association, vol. 78(4), pages 647-61, September.
- Piga, Gustavo, 2000. " Dependent and Accountable: Evidence from the Modern Theory of Central Banking," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 14(5), pages 563-95, December.
- Olivier J. Blanchard & Lawrence H. Summers, 1986.
"Hysteresis and the European Unemployment Problem,"
NBER Working Papers
1950, National Bureau of Economic Research, Inc.
- Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 427, Massachusetts Institute of Technology (MIT), Department of Economics.
- Gottfries, Nils & Horn, Henrik, 1987. "Wage Formation and the Persistence of Unemployment," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 97(388), pages 877-84, December.
- L. Pecchi & G. Piga, 1999. "The Politics of Index-Linked Bonds," Economics and Politics, Wiley Blackwell, Wiley Blackwell, vol. 11(2), pages 201-212, 07.
- Karl Brunner, 1985. "The Poverty of Nations," Cato Journal, Cato Journal, Cato Institute, Cato Journal, Cato Institute, vol. 5(1), pages 37-49, Spring/Su.
- Neiss, Katharine S, 1999. "Discretionary Inflation in a General Equilibrium Model," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 31(3), pages 357-74, August.
- Waller, Christopher J, 1992. "The Choice of a Conservative Central Banker in a Multisector Economy," American Economic Review, American Economic Association, American Economic Association, vol. 82(4), pages 1006-12, September.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.