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Inflation, distortionary taxation and the design of monetary policy: the role of social cohesion

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Abstract

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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  • H.M. Prast, 1997. "Inflation, distortionary taxation and the design of monetary policy: the role of social cohesion," WO Research Memoranda (discontinued) 508, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:wormem:508
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    Cited by:

    1. Prof. Neil D. Karunaratne, 2000. "Inflation Targeting Macroeconomic Distortions and the Policy Reaction Function," Discussion Papers Series 269, School of Economics, University of Queensland, Australia.
    2. Pieter H.M. Ruys & René van den Brink & Radislav Semenov, 2000. "Values and governance systems," Chapters,in: Institutions, Contracts and Organizations, chapter 27 Edward Elgar Publishing.
    3. van den Brink, J.R. & Ruys, P.H.M. & Semenov, R., 1999. "Governance of Clubs and Firms with Cultural Dimensions," Discussion Paper 1999-101, Tilburg University, Center for Economic Research.

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