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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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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2013-017.

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Date of creation: 2013
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Handle: RePEc:fip:fedlwp:2013-017

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Keywords: Debt ; Inflation (Finance) ; Banks and banking; Central;

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References

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Cited by:
  1. Kliem, Martin & Kriwoluzky, Alexander & Sarferaz, Samad, 2013. "On the low-frequency relationship between public deficits and inflation," Discussion Papers 12/2013, Deutsche Bundesbank, Research Centre.
  2. Aleksander Berentsen & Samuel Huber & Alessandro Marchesiani, 2012. "Degreasing the wheels of finance," ECON - Working Papers 101, Department of Economics - University of Zurich.

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