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The Tragedy of the Commons and Inflation Bias in the Euro Area

Author

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  • Valeriya Dinger

    ()

  • Sven Steinkamp

    ()

  • Frank Westermann

    ()

Abstract

Central bank credit has expanded dramatically in some of the Euro Area member countries since the beginning of the financial crisis. This paper makes two contributions to understand this stylized fact. First, we discuss a simple model of monetary policy that includes (i) a credit channel and (ii) a common pool problem in a monetary union. We illustrate that the interaction of the two elements leads to an inflation bias that is independent of the standard time-inconsistency bias. Secondly, we present an institutional analysis that is consistent with the view of fragmented monetary policy and empirical evidence that illustrates the heterogeneity of central bank credit expansion. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Valeriya Dinger & Sven Steinkamp & Frank Westermann, 2014. "The Tragedy of the Commons and Inflation Bias in the Euro Area," Open Economies Review, Springer, vol. 25(1), pages 71-91, February.
  • Handle: RePEc:kap:openec:v:25:y:2014:i:1:p:71-91
    DOI: 10.1007/s11079-013-9300-x
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    File URL: http://hdl.handle.net/10.1007/s11079-013-9300-x
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    Cited by:

    1. Raphael A. Auer, 2014. "What drives TARGET2 balances? Evidence from a panel analysis," Economic Policy, CEPR;CES;MSH, vol. 29(77), pages 139-197, January.
    2. Wolf, Marvin, 2013. "Währungsunionen und Allmendeproblem," Hannover Economic Papers (HEP) dp-521, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    3. repec:kap:openec:v:28:y:2017:i:3:d:10.1007_s11079-016-9412-1 is not listed on IDEAS
    4. Henning Bohn & Otmar Issing & Frank Westermann, 2016. "The European Monetary System: Deficits and Cures," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 69(09), pages 18-24, May.
    5. Vânia G. Silva & Esmeralda A. Ramalho & Carlos R. Vieira, 2017. "The Use of Cheques in the European Union: A Cross-Country Analysis," Open Economies Review, Springer, vol. 28(3), pages 581-602, July.

    More about this item

    Keywords

    Tragedy of the Commons; Inflation bias; Credit channel; TARGET2; Euro area; E52; E58; H41;

    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
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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