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Low inflation at no cost? A numerical simulations exercise

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Author Info
M. Demertzis

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Abstract

The independent nature of the Central Bank is often associated with achieving low and stable inflation. Further to that the merits of independence are stretched to achieving low(er) output variability when compared to a government run monetary policy. In this paper we use the Alesina and Alesina and Gatti model to examine how often an Independent Central Bank can achieve an improvement on both counts. To do that we run numerical simulations where we change the ex ante probability of elections (and hence the degree of electoral uncertainty) with a view to determining how the private sector's perceptions affect the level of output variability. Our conclusions agree with the Alesina and Gatti assertion that there will exist occasions that both political parties will consent to the running of monetary policy by an independent institution but that is the least often occurred outcome. On theoretical grounds therefore, the trade-off between inflation and output variability (à la Rogoff) is still a valid one.

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Publisher Info
Paper provided by Netherlands Central Bank in its series DNB Staff Reports (discontinued) with number 72.

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Length: 27 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:dnb:staffs:72

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Related research
Keywords: Central Bank Independence; Output stability; Political uncertainty;

Find related papers by JEL classification:
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

References listed on IDEAS
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  1. Demertzis, Maria & Hughes Hallett, Andrew & Viegi, Nicola, 2004. "An independent central bank faced with elected governments," European Journal of Political Economy, Elsevier, vol. 20(4), pages 907-922, November. [Downloadable!] (restricted)
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  2. Alesina, Alberto & Gatti, Roberta, 1995. "Independent Central Banks: Low Inflation at No Cost?," American Economic Review, American Economic Association, vol. 85(2), pages 196-200, May. [Downloadable!] (restricted)
  3. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, December.
  4. Cukierman, A., 1996. "The Economics of Central Banking," Papers 36-96, Tel Aviv.
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  5. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Working Papers in Applied Economic Theory 94-05, Federal Reserve Bank of San Francisco.
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  6. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May. [Downloadable!] (restricted)
  7. Crosby, Mark, 1998. "Central bank independence and output variability," Economics Letters, Elsevier, vol. 60(1), pages 67-75, July. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. M. Demertzis & A. Hughes Hallett & N. Viegi, 2002. "An Independent Central Bank faced with Elected Government: A Political Economy Conflict," WO Research Memoranda (discontinued) 686, Netherlands Central Bank, Research Department.
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