Economic Reforms and the Indirect Role of Monetary Policy
Due to pressure from some lobbies, the government is unwilling to perform structural reforms. The probability of its reelection depends, however, on a positive business cycle. The central bank may create surprise deflation even though it maximizes the public’s utility function and even if it faces a rational market. This may explain why the ECB, but not the US FED, is found to be unaffected by the inflation bias.
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- Barro, Robert J & Gordon, David B, 1983.
"A Positive Theory of Monetary Policy in a Natural Rate Model,"
Journal of Political Economy,
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NBER Working Papers
1838, National Bureau of Economic Research, Inc.
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- Fratianni, Michele & von Hagen, Jurgen & Waller, Christopher J, 1997. "Central Banking as a Political Principal-Agent Problem," Economic Inquiry, Western Economic Association International, vol. 35(2), pages 378-93, April.
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