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A nonnormative theory of inflation and central bank independence

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  • Berthold Herrendorf
  • Manfred Neumann

Abstract

We study monetary policy when the labor-market insiders set the wage so that the outsiders are involuntarily unemployed. If the insiders are in the majority, the representative insider will be the median voter. Consequently, neither an independent nor a government-dependent central banker is found to produce a systematic inflation bias, albeit equilibrium employment is too low from a social welfare point of view. The disadvantage of government-dependence is that the central bank takes the government's reelection prospects into account and creates a political cycle in inflation. Our theory is consistent with the main stylized facts that a higher degreee of central bank independence decreases average inflation and inflation variability, but does not affect output variability.

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Bibliographic Info

Article provided by Springer in its journal Weltwirtschaftliches Archiv.

Volume (Year): 136 (2000)
Issue (Month): 2 (June)
Pages: 315-333

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Handle: RePEc:spr:weltar:v:136:y:2000:i:2:p:315-333

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Keywords: E52; E58;

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Cited by:
  1. Berlemann, Michael & Markwardt, Gunther, 2003. "Partisan cycles and pre-electoral uncertainty," Dresden Discussion Paper Series in Economics 01/03, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  2. Berthold Herrendorf & Manfred J.M. Neumann, 2003. "The Political Economy of Inflation, Labour Market Distortions and Central Bank Independence," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 113(484), pages 43-64, January.

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