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Fiscal Policy Restrictions on Inflation Targeting: A Political Economy Approach

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  • Hernando Vargas,

    ()

  • Yanneth Rocío Betancourt,

    ()

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    Abstract

    Fiscal policy may impose restrictions on Inflation Targeting when Central Bank Independence (cbi) is institutionally weak and society has a real exchange rate target that is highly valued. In this environment, fiscal policy constrains the decisions of a committed, independent Central Bank (cb) regarding inflation. When such a pressure is strong enough to threaten cbi, monetary authorities react by setting an inflation target that differs from the one that would prevail in the absence of those threats. A simple model is used to illustrate this point where the cb takes into account the probability of survival as an independent institution.

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    File URL: http://economia.uniandes.edu.co/revistadys/65/06_Fiscal_policy.pdf
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    Bibliographic Info

    Article provided by UNIVERSIDAD DE LOS ANDES-CEDE in its journal REVISTA DESARROLLO Y SOCIEDAD.

    Volume (Year): (2010)
    Issue (Month): ()
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    Handle: RePEc:col:000090:009012

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    Keywords: central bank independence; fiscal policy restrictions; inflation targeting.;

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    1. Collard, Fabrice & Fève, Patrick & Matheron, Julien, 2007. "The Dynamic Effects of Disinflation Policies," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 426, Institut d'Économie Industrielle (IDEI), Toulouse.
    2. Andreas Fischer, 1996. "Central bank independence and sacrifice ratios," Open Economies Review, Springer, Springer, vol. 7(1), pages 5-18, January.
    3. Giuseppe Diana & Moïse Sidiropoulos, 2004. "Central Bank Independence, Speed of Disinflation and the Sacrifice Ratio," Open Economies Review, Springer, Springer, vol. 15(4), pages 385-402, October.
    4. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, World Bank Group, vol. 6(3), pages 353-98, September.
    5. Eijffinger, S.C.W. & Schaling, E., 1992. "Central bank independence: Criteria and indices," Research Memorandum, Tilburg University, Faculty of Economics and Business Administration 548, Tilburg University, Faculty of Economics and Business Administration.
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