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

  • Valeriya Dinger


  • Sven Steinkamp


  • Frank Westermann


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

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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 25 (2014)
Issue (Month): 1 (February)
Pages: 71-91

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Handle: RePEc:kap:openec:v:25:y:2014:i:1:p:71-91
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