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Designing Central Banks for Inflation Stability

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  • Benigno, Pierpaolo

Abstract

Well-designed central banks can uniquely determine a stable inflation rate following either active Taylor's rules or interest-rate pegs. They should receive an initial transfer of capital, hold only risk-free assets, rebate their income to the treasury. This system prevents permanent liquidity traps and inflationary spirals without further need of treasury's support beyond the initial capitalization. Instead, if the central bank engages in purchases of risky securities, fiscal support is required to uniquely back the value of money. Absent treasury's support and with a risky composition of assets, inflationary spirals and deflationary traps can develop due to self-fulfilling expectations or credit events.

Suggested Citation

  • Benigno, Pierpaolo, 2016. "Designing Central Banks for Inflation Stability," CEPR Discussion Papers 11402, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11402
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    References listed on IDEAS

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    Cited by:

    1. Donato Masciandaro, 2016. "More than the Human Appendix: Fed Capital and Central Bank Financial Independence," BAFFI CAREFIN Working Papers 1635, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    2. Michele Cavallo & Marco Del Negro & W. Scott Frame & Jamie Grasing & Benjamin A. Malin & Carlo Rosa, 2019. "Fiscal Implications of the Federal Reserve's Balance Sheet Normalization," International Journal of Central Banking, International Journal of Central Banking, vol. 15(5), pages 255-306, December.
    3. Donato Masciandaro & Davide Romelli, 2019. "Behavioral Monetary Policymaking: Economics, Political Economy and Psychology," World Scientific Book Chapters, in: Behavioral Finance The Coming of Age, chapter 9, pages 285-329, World Scientific Publishing Co. Pte. Ltd..
    4. Favaretto, Federico & Masciandaro, Donato, 2016. "Doves, hawks and pigeons: Behavioral monetary policy and interest rate inertia," Journal of Financial Stability, Elsevier, vol. 27(C), pages 50-58.
    5. D. Masciandaro, 2019. "What Bird Is That? Central Banking And Monetary Policy In The Last Forty Years," BAFFI CAREFIN Working Papers 19127, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

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