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Non-benevolent central banks

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  • Lambsdorff, Johann
  • Schinke, Michael
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    Abstract

    Corruption at central banks induces distorted policies by generating a tendency to increase inflation. An inflation bias arises because the public distrusts central bank’s benevolence, not only its commitments. We show that distrust among the public, measured by a high level of expected inflation, can have positive effects because it may sanction a conservative central banker, forcing him to lower realized inflation levels. Giving central banks a high level of independence will fail if this not only insulates central bankers from troublesome political interference but also provides them with the leeway necessary to carry out corrupt transactions. --

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    Bibliographic Info

    Paper provided by University of Goettingen, Department of Economics in its series Center for European, Governance and Economic Development Research Discussion Papers with number 16.

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    Date of creation: 2002
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    Handle: RePEc:zbw:cegedp:16

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    Postal: Platz der Göttinger Sieben 3, 37073 Göttingen
    Web page: http://www.cege.wiso.uni-goettingen.de/
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    Related research

    Keywords: Corruption; central banks; time-inconsistency; inflation bias; seignorage; central bank independence;

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    1. Wintrobe, Ronald & Breton, Albert, 1986. "Organizational Structure and Productivity," American Economic Review, American Economic Association, American Economic Association, vol. 76(3), pages 530-38, June.
    2. Lambsdorff, Johann Graf, 2002. "Making corrupt deals: contracting in the shadow of the law," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 48(3), pages 221-241, July.
    3. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, American Economic Association, vol. 85(1), pages 150-67, March.
    4. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
    5. Casey B. Mulligan & Xavier X. Sala-i-Martin & Frederic S. Mishkin & Jonas D. M. Fisher, 1997. "The optimum quantity of money: theory and evidence," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 687-724.
    6. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(4), pages 1169-89, November.
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