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

Author Info

  • Dinger, Valeriya

    (Universitaet Osnabrueck)

  • Steinkamp, Sven

    (Universitaet Osnabrueck)

  • Westermann, Frank

    ()

    (Universitaet Osnabrueck)

Abstract

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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Keywords: Tragedy of the Commons; Inflation Bias; Credit Channel; TARGET2; Euro Area;

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Find related papers by JEL classification:
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
  • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
  • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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Cited by:

  1. Raphael A. Auer, 2013. "What Drives Target2 Balances? Evidence From a Panel Analysis," Working Papers 13.03, Swiss National Bank, Study Center Gerzensee.
  2. Henning Bohn & Otmar Issing & Frank Westermann, 2016. "The European Monetary System: Deficits and Cures," Ifo Schnelldienst, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 69(09), pages 18-24, 05.
  3. Wolf, Marvin, 2013. "Währungsunionen und Allmendeproblem," Hannover Economic Papers (HEP) dp-521, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.

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