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Debt, inflation and central bank independence

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  • Fernando M. Martin

Abstract

Making the central bank more independent from political pressures lowers inflation and increases the primary deficit, persistently. In the long-run, however, fiscal considerations are paramount and inflation comes back up to accommodate the higher financial burden of accumulated public debt. Endowing instead the central bank with an explicit inflation target lowers long-run inflation and implies non-trivial welfare gains for private agents. Inflation-targeting has the added virtue of determining the primary deficit independently of political frictions. The theory helps explain several key developments in postwar U.S. policy.

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  • Fernando M. Martin, 2013. "Debt, inflation and central bank independence," Working Papers 2013-017, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2013-017
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    More about this item

    Keywords

    Debt; Inflation (Finance); Banks and banking; Central;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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