An equilibrium analysis of central bank independence and inflation
A dynamic equilibrium model is constructed to analyze the implications of different degrees of central bank independence. In the main model, agents are permitted to vote on the desired inflation and labor taxes to finance government spending. Multiple perfect-foresight equilibria arise, and one of them exhibits fluctuations in output, investment, and the inflation rates as a result of permitting agents to vote. If, instead of having agents vote each period on these parameters, inflation and labor taxes in the model are set at fixed levels, these fluctuations do not arise, and a lower inflation rate can appear.
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|Date of creation:||1995|
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