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A non-normative theory of inflation and central bank independence

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Herrendorf, Berthold and Neumann, Manfred J. M. (1998) A non-normative theory of inflation and central bank independence. Working Paper. Covnetry: University of Warwick, Department of Economics. Warwick economic research papers (No.515).

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Abstract

We study monetary policy under different central bank constitutions when the labor-market insiders set the nominal wage so that the outsiders are involuntarily unemployed. If the insiders are in the majority, the representative insider will be the median voter. We show that an independent central bank, if controlled by the median voter, does not produce a systematic inflation bias, albeit equilibrium employment is too low from a social welfare point of view. A dependent central bank, in contrast, is forced by the government to collect seigniorage and to take the government's re-election prospects into account. The predictions of our theory are consistent with the evidence that central bank independence decreases average inflation and inflation variability, but does not affect employment variability.

Item Type:

Working or Discussion Paper (Working Paper)

Subjects:

H Social Sciences > HG Finance

Divisions:

Faculty of Social Sciences > Economics

Library of Congress Subject Headings (LCSH):

Banks and banking, Central, Inflation (Finance), Monetary policy, Voting research

Series Name:

Warwick economic research papers

Publisher:

University of Warwick, Department of Economics

Place of Publication:

Covnetry

Official Date:

August 1998

Dates:

Date	Event
August 1998	Published

Number:

No.515

Number of Pages:

Status:

Not Peer Reviewed

Access rights to Published version:

Open Access

Funder:

Sonderforschungsbereich 303 -- "Information und die Koordination wirtschaftlicher Aktivitäten"

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