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Central Bank independence: Low inflation at no cost? A numerical simulations exercise

  • Demertzis, Maria

The independent nature of the Central Bank is often associated with achieving low and stable inflation. Further to that the merits of independence are stretched to achieving low(er) output variability when compared to a government run monetary policy. In this paper we use the Alesina and Alesina and Gatti model to examine how often an Independent Central Bank can achieve an improvement on both counts. To do that we run numerical simulations where we change the ex ante probability of elections (and hence the degree of electoral uncertainty) with a view to determining how the private sector's perceptions affect the level of output variability. Our conclusions agree with the Alesina and Gatti assertion that there will exist occasions that both political parties will consent to the running of monetary policy by an independent institution but that is the least often occurred outcome. On theoretical grounds therefore, the trade-off between inflation and output variability (� la Rogoff) is still a valid one.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 26 (2004)
Issue (Month): 4 (December)
Pages: 661-677

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Handle: RePEc:eee:jmacro:v:26:y:2004:i:4:p:661-677
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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  1. Cukierman, A., 1996. "The Economics of Central Banking," Papers 36-96, Tel Aviv.
  2. Alesina, Alberto & Gatti, Roberta, 1995. "Independent Central Banks: Low Inflation at No Cost?," American Economic Review, American Economic Association, vol. 85(2), pages 196-200, May.
  3. Crosby, Mark, 1998. "Central bank independence and output variability," Economics Letters, Elsevier, vol. 60(1), pages 67-75, July.
  4. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 195-225.
  5. Demertzis, Maria & Hughes Hallett, Andrew & Viegi, Nicola, 2004. "An independent central bank faced with elected governments," European Journal of Political Economy, Elsevier, vol. 20(4), pages 907-922, November.
  6. Melitz, Jacques, 1997. "Some Cross-Country Evidence about Debt, Deficits and the Behaviour of Monetary and Fiscal Authorities," CEPR Discussion Papers 1653, C.E.P.R. Discussion Papers.
  7. 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.
  8. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
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