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A Central Bank For All Seasons? The “Lower Inflation At No Cost” Proposition Under Conditions Of Political Uncertainty

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  • HALLETT, ANDREW HUGHES

Abstract

Recent literature on independent and conservative Central Banks has highlighted the possibility of achieving lower inflation for no increase in the volatility of output—especially when political influences are taken into account. We extend this idea to allow for political uncertainty, where political parties get elected with a probability that may vary over time. We find that it is no longer possible to guarantee lower inflation at no cost at all times. But it is possible to guarantee one or other property if the bank is very conservative or if the governments are always liberal. That implies a conventional inflation–output stability trade-off. However, it is also possible to have conditions in which neither property applies.

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  • Hallett, Andrew Hughes, 2004. "A Central Bank For All Seasons? The “Lower Inflation At No Cost” Proposition Under Conditions Of Political Uncertainty," Macroeconomic Dynamics, Cambridge University Press, vol. 8(2), pages 207-225, April.
    • Handle: RePEc:cup:macdyn:v:8:y:2004:i:02:p:207-225_03
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    Cited by:

    1. Andrew Hughes Hallett & Lorian D. Proske, 2018. "Conservative central banks: how conservative should a central bank be?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 65(1), pages 97-104, February.

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