Inflation, distortionary taxation and the design of monetary policy: the role of social cohesion
This study gives a critical assessment of the existing empirical literature on central bank independence and inflation. From a cross-sectional analysis of the 15 EU-member states it is concluded, that central bank independence does not significantly reduce inflation if the effect of taxation and social cohesion is taken into account. The two latter variables turn out to affect inflation significantly, however. In countries with a large degree of social cohesion, measured by government expenditures on social protection as a fraction of GDP, inflation is significantly lower. An explanation for this phenomenon is that in countries that offer more social protection the willingness to commit monetary policy to price stability is greater.
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