IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Central Bank Independence and the `Free Lunch Puzzle': A New Perspective

  • Ali al-Nowaihi

    (University of Leicester)

  • Paul Levine

    (University of Surrey)

  • Alex Mandilaras

    (University of Surrey)

A new perspective is provided on a puzzle that has emerged from the empirical lit- erature suggesting that government-independent central banks provide a `free lunch': lower in°ation is apparently achieved at no cost in terms of greater output variance. We assess the various explanations provided by the theoretical literature. After revis- iting the free lunch puzzle and con¯rming the empirical importance of open-economy effects, we develop a Rogoff-style delegation model that combines the latter with po- litical monetary cycle e®ects. We show that if all countries delegate monetary policy to government independent banks, as economies become more integrated then a low inflation, higher output variance trade-off re-emerges.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.fahs.surrey.ac.uk/economics/discussion_papers/2006/DP08-06.pdf
Download Restriction: no

Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 0806.

as
in new window

Length: 31 pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:sur:surrec:0806
Contact details of provider: Postal: Guildford, Surrey GU2 5XH
Phone: (01483) 259380
Fax: (01483) 259548
Web page: http://www.surrey.ac.uk/economics/Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Beetsma, Roel & Bovenberg, A Lans, 1999. "Inflation Targets and Debt Accumulation in a Monetary Union," CEPR Discussion Papers 2324, C.E.P.R. Discussion Papers.
  2. David Romer, 1991. "Openness and inflation: theory and evidence," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  3. Willem H. Buiter, 2005. "New Developments in Monetary Economics: Two ghosts, Two Eccentricities, a Fallacy, a Mirage and a Mythos," Economic Journal, Royal Economic Society, vol. 115(502), pages C1-C31, 03.
  4. Ali al-Nowaihi & Paul Levine, . "Can Political Monetary Cycles be Avoided?," Discussion Papers in European Economics 97/4, Department of Economics, University of Leicester.
  5. Marta Campillo & Jeffrey A. Miron, 1996. "Why Does Inflation Differ Across Countries?," NBER Working Papers 5540, National Bureau of Economic Research, Inc.
  6. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  7. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  8. Mandilaras, Alexandros & Levine, Paul, 2001. "Public Debt and Inflation: The Role of Inflation-Sensitive Instruments," Manchester School, University of Manchester, vol. 69(0), pages 1-21, Supplemen.
  9. Eijffinger, S.C.W. & Hoeberichts, M.M., 1996. "The Trade Off Between Central Bank Independence and Conservativeness," Discussion Paper 1996-44, Tilburg University, Center for Economic Research.
  10. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-98, September.
  11. Andrew Hughes Hallett & Diana N. Weymark, 2005. "Independence Before Conservatism: Transparency, Politics and Central Bank Design," German Economic Review, Verein für Socialpolitik, vol. 6(1), pages 1-21, 02.
  12. repec:ner:tilbur:urn:nbn:nl:ui:12-76576 is not listed on IDEAS
  13. Demertzis, Maria & Hughes Hallett, Andrew & Viegi, Nicola, 2004. "An independent central bank faced with elected governments," European Journal of Political Economy, Elsevier, vol. 20(4), pages 907-922, November.
  14. Alessandro Missale & Olivier Jean Blanchard, 1991. "The Debt Burden and Debt Maturity," NBER Working Papers 3944, National Bureau of Economic Research, Inc.
  15. Beetsma, Roel & Bovenberg, A Lans, 2003. "Political Shocks, Public Debt and the Design of Monetary and Fiscal Institutions," CEPR Discussion Papers 3753, C.E.P.R. Discussion Papers.
  16. Bennett T. McCallum, 1995. "Two Fallacies Concerning Central Bank Independence," NBER Working Papers 5075, National Bureau of Economic Research, Inc.
  17. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May.
  18. Currie, David & Levine, Paul & Pearlman, Joseph, 1996. "The Choice of 'Conservative' Bankers in Open Economies: Monetary Regime Options for Europe," Economic Journal, Royal Economic Society, vol. 106(435), pages 345-58, March.
  19. Beetsma, R.M.W.J. & Bovenberg, A.L., 1999. "Inflation Targets and Debt Accumulation in a Monetary Union," Discussion Paper 1999-108, .
  20. repec:fth:tilbur:99108 is not listed on IDEAS
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:sur:surrec:0806. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Alex Mandilaras)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.