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Fiscal Policy Restrictions on Inflation Targeting: A Political Economy Approach

  • Hernando Vargas,

    ()

  • Yanneth Rocío Betancourt,

    ()

Fiscal policy may impose restrictions on Inflation Targeting when Central Bank Independence (cbi) is institutionally weak and society has a real exchange rate target that is highly valued. In this environment, fiscal policy constrains the decisions of a committed, independent Central Bank (cb) regarding inflation. When such a pressure is strong enough to threaten cbi, monetary authorities react by setting an inflation target that differs from the one that would prevail in the absence of those threats. A simple model is used to illustrate this point where the cb takes into account the probability of survival as an independent institution.

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File URL: http://economia.uniandes.edu.co/revistadys/65/06_Fiscal_policy.pdf
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Article provided by UNIVERSIDAD DE LOS ANDES-CEDE in its journal REVISTA DESARROLLO Y SOCIEDAD.

Volume (Year): (2010)
Issue (Month): ()
Pages:

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Handle: RePEc:col:000090:009012
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  1. Giuseppe Diana & Moïse Sidiropoulos, 2004. "Central Bank Independence, Speed of Disinflation and the Sacrifice Ratio," Open Economies Review, Springer, vol. 15(4), pages 385-402, October.
  2. repec:dgr:kubrem:1992548 is not listed on IDEAS
  3. Andreas Fischer, 1996. "Central bank independence and sacrifice ratios," Open Economies Review, Springer, vol. 7(1), pages 5-18, January.
  4. Collard , F. & Fève, P. & Matheron, J., 2007. "The Dynamic Effects of Disinflation Policies," Working papers 190, Banque de France.
  5. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-98, September.
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