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The Political Economy of Inflation, Labour Market Distortions and Central Bank Independence

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  • Herrendorf, Berthold
  • Neumann, Manfred J.M.

Abstract

Using the citizen-candidate model, we relate the monetary policy objective to individuals' voting decisions and characterize equilibrium inflation and employment under central bank dependence and independence. We also endogenize the decisions about the labour market distortion and central bank independence. Our results are consistent with the fact that across OECD countries, independence is negatively correlated with average inflation and inflation variability and uncorrelated with employment variability. Moreover, we can explain why: (i) in several countries, central banks became independent while labour market distortions remained; (ii) notwithstanding McCallum's (1995) critique, delegation of monetary policy is effective; (iii) some independent central banks do not generate an inflation bias yet stabilize.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1969.

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Date of creation: Oct 1998
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Handle: RePEc:cpr:ceprdp:1969

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Keywords: central bank board; Central Bank Independence; Median Voter; partisan business cycle; representative democracy;

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References

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Citations

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Cited by:
  1. Giovanni Di Bartolomeo & Debora Di Gioacchino, 2005. "Fiscal-Monetary Policy Coordination And Debt Management: A Two Stage Dynamic Analysis," Macroeconomics 0504024, EconWPA.
  2. Grüner, Hans Peter, 2010. "Why EMU is not a failure," European Journal of Political Economy, Elsevier, vol. 26(1), pages 1-11, March.
  3. Helge Berger, 2006. "Optimal central bank design: Benchmarks for the ECB," The Review of International Organizations, Springer, vol. 1(3), pages 207-235, September.
  4. Sean Holly & Arnab Bhattacharjee, 2005. "Inflation Targeting, Committee Decision Making and Uncertainty: The case of the Bank of England's MPC," Computing in Economics and Finance 2005 119, Society for Computational Economics.
  5. Alessandro Missale & Elisabetta Falcetti, . "Public Debt Indexation and Denomination with and Indipendent Central Bank," Working Papers 169, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  6. Ullrich, Katrin, 2003. "Unabhängigkeit und Verantwortlichkeit der Europäischen Zentralbank," ZEW Discussion Papers 03-65, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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