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A non-Normative Theory of Inflation and Central Bank Independence

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Author Info
Herrendorf, B.
Neumann, M.J.M.
Abstract

We study monetary policy under different central bank constitutions when the labor-market insiders set the nominal wage so that outsiders are involuntarily unemployed. If the insiders are in the majority, the representative insider will be the median voter. We show that an independent central bank, if controlled by the median voter, does not produce a systematic inflation bias, albeit equilibrium employment is too low from a social welfare point of view. A dependent central bank, in contrast, is forced by the government to collect seigniorage and to take the government's re-election prospects into account. The predictions of our theory are consistent with the evidence that central bank independence decreases average inflation and inflation variability, but does not affect employment variability.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/publications/paper.pdf
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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 515.

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Length: 20 pages
Date of creation: 1998
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Handle: RePEc:wrk:warwec:515

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Related research
Keywords: INFLATION ; MONETARY POLICY ; CENTRAL BANKS;

Find related papers by 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

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  1. Eijffinger, Sylvester & Schaling, Eric & Hoeberichts, Marco, 1998. "Central bank independence: A sensitivity analysis," European Journal of Political Economy, Elsevier, vol. 14(1), pages 73-88, February. [Downloadable!] (restricted)
  2. Richard H. Clarida & Mark Gertler, 1997. "How the Bundesbank Conducts Monetary Policy," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 363-412 National Bureau of Economic Research, Inc. [Downloadable!]
    Other versions:
  3. Jon Faust, 1992. "Whom can we trust to run the Fed? Theoretical support for the founders' views," International Finance Discussion Papers 429, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  4. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," Working papers 427, Massachusetts Institute of Technology (MIT), Department of Economics.
    Other versions:
  5. Unknown, 1998. "Discussion," Journal of Economic Psychology, Elsevier, vol. 19(5), pages 645-650, October. [Downloadable!] (restricted)
  6. Svensson, Lars E O, 1995. "Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts," CEPR Discussion Papers 1249, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  7. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March. [Downloadable!] (restricted)
  8. Fratianni, Michele & von Hagen, Jurgen & Waller, Christopher J, 1997. "Central Banking as a Political Principal-Agent Problem," Economic Inquiry, Oxford University Press, vol. 35(2), pages 378-93, April.
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  9. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608.
  10. Berger, Helge & Woitek, Ulrich, 1997. "How opportunistic are partisan German central bankers: Evidence on the Vaubel hypothesis," European Journal of Political Economy, Elsevier, vol. 13(4), pages 807-821, December. [Downloadable!] (restricted)
  11. Manfred Neumann, 1991. "Precommitment by central bank independence," Open Economies Review, Springer, vol. 2(2), pages 95-112, June. [Downloadable!] (restricted)
  12. Vaubel, Roland, 1997. "The bureaucratic and partisan behavior of independent central banks: German and international evidence," European Journal of Political Economy, Elsevier, vol. 13(2), pages 201-224, May. [Downloadable!] (restricted)
  13. Günter Coenen & Athanasios Orphanides & Volker Wieland, 2003. "Price stability and monetary policy effectiveness when nominal interest rates are bounded at zero," Working Paper Series 231, European Central Bank. [Downloadable!]
    Other versions:
  14. Persson, Torsten & Roland, Gérard & Tabellini, Guido, 1996. "Separation of Powers and Accountability: Towards a Formal Approach to Comparative Politics," CEPR Discussion Papers 1475, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  15. 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)
  16. José Angulo & N. Cressie & C. Wikle & P. Soidán & M. Bande & C. Glasbey & John Kent & Ana Militino & Michael Stein, 1998. "Discussion," TEST: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer, vol. 7(2), pages 283-285, December. [Downloadable!] (restricted)
  17. Unknown, 1998. "Discussion," Journal of Economic Psychology, Elsevier, vol. 19(5), pages 651-652, October. [Downloadable!] (restricted)
  18. Unknown, 1998. "Discussion," Journal of Economic Psychology, Elsevier, vol. 19(5), pages 619-643, October. [Downloadable!] (restricted)
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