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The Tragedy of the Commons and Inflation Bias in the Euro Area

  • Dinger, Valeriya

    (Universitaet Osnabrueck)

  • Steinkamp, Sven

    (Universitaet Osnabrueck)

  • Westermann, Frank

    ()

    (Universitaet Osnabrueck)

Central bank credit has expanded dramatically in some of the euro area member countries since the beginning of the financial crisis. This paper makes two contributions to understand this stylized fact. First, we discuss a simple model of monetary policy that includes (i) a credit channel and (ii) a common pool problem in a monetary union. We illustrate that the interaction of the two elements leads to an inflation bias that is independent of the standard time-inconsistency bias. Secondly, we present empirical evidence that is consistent with the view that national central banks in the euro area have indeed followed an independent monetary policy. We show that after 2007, central bank credit has been highly correlated with unemployment, but not with inflation in the respective countries.

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Paper provided by Institute of Empirical Economic Research in its series Working Papers with number 94.

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Length: 26
Date of creation: 30 Nov 2012
Date of revision:
Handle: RePEc:iee:wpaper:wp0094
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