Herrendorf, Berthold and Neumann, Manfred J. M. (Manfred Johann Michael), 1940- (1998) A non-normative theory of inflation and central bank independence. Working Paper. University of Warwick, Department of Economics, Covnetry.

Preview

PDF WRAP_Herrendorf_515_paper.pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader Download (219Kb)

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
Date:	August 1998
Number:	No.515
Number of Pages:	21
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Funder:	Sonderforschungsbereich 303 -- "Information und die Koordination wirtschaftlicher Aktivitäten"
References:	Alesina, Alberto and Lawrence H. Summers, \Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit, and Banking, 1993, 25, 157{162. Alt, James E., \Leaning into the Wind or Ducking out of the Storm? US Monetary Policy in the 1980s," in Alberto Alesina and Georey Carliner, eds., Politics and Economics in the Eighties, Chicago University Press, 1992. Barro, Robert J. and David Gordon, \Rules, Discretion, and Reputation in a Model of Monetary Policy," Journal of Monetary Economics, 1983, 12, 101{121. Berger, Helge and Ulrich Woitek, \How Opportunistic are Partisan German Central Bankers: Evidence on the Vaubel Hypothesis," European Journal of Political Economy, 1997, 13, 807{821. Blanchard, Olivier and Lawrence Summers, \Hysteresis and the European Unemployment Problem," NBER Macroeconomics Annual, 1986, pp. 15{77. and Nobu Kiyotaki, \Monopolistic Competition and the Eects of Aggregate Demand," American Economic Review, 1987, 77, 647{666. Blinder, Alan S., Central Banking in Theory and Practice, Cambridge, MA: MIT Press, 1998. Booth, Alison L., The Economics of the Trade Union, Cambridge, UK: Cambridge University Press, 1995. Boskin, Michael J., Ellen R. Dulberger, Robert J. Gordon, Zvi Griliches, and Dale W. Jorgenson, \Measuring the CPI," Journal of Economic Perspectives, 1998, 12, 3{26. Clarida, Richard and Mark Gertler, \How the Bundesbank Conducts Monetary Policy," in Christina and David Romer, eds., Reducing Inflation: Motivation and Strategy, Chicago: University of Chicago Press, 1997. Cukierman, Alex, Central Bank Strategy, Credibility, and Independence: Theory and Evidence, Cambridge, MA: The MIT Press, 1992. , Sebastian Edwards, and Guido Tabellini, \Seigniorage and Political Instability," American Economic Review, 1992, 82, 537{555. de Kock, Gabriel and Vittorio Grilli, \Fiscal Policies and the Choice of the Exchange Rate Regime," Economic Journal, 1993, 103, 347{358. Eijffinger, Sylvester, Eric Schaling, and Marco Hoeberichts, \Central Bank Independence: A Sensitivity Analysis," European Journal of Political Economy, 1998, 14, 73{88. Faust, Jon, \Whom Can We Trust to Run the Fed? Theoretical Support for the Founders' View," Journal of Monetary Economics, 1996, 37, 267{283. Fratianni, Michele, Jürgen von Hagen, and Christopher Waller, \Central Banking as a Principal Agent Problem," Economic Inquiry, 1997, 35, 378{393. Grier, Kevin B., \Congressional Influence on US Monetary Policy: an Empirical Test," Journal of Monetary Economics, 1991, 28, 201{220. Grilli, Vittorio, Donato Masciandaro, and Guido Tabellini, \Political and Monetary Institutions and Public Financial Policies in the Industrialized Countries," Economic Policy, 1991, 13, 341{392. Herrendorf, Berthold, \Optimal Collection of Time Consistent Seigniorage: A Unifying Framework," Journal of Economic Surveys, 1997, 11, 1{46. and Ben Lockwood, \Rogoff's 'Conservative' Central Banker Restored," Journal of Money, Credit, and Banking, 1997, 29, 476{495. and Manfred J.M. Neumann, \The Political Economy of In ation and Central Bank Independence," Discussion Paper 1787, CEPR, London, UK 1998. Lohmann, Susanne, \Institutional Checks and Balances and the Political Control of the Money Supply," Mimeo, UCLA 1995. Neumann, Manfred J.M., \Precommitment by Central Bank Independence," Open Economies Review, 1991, 2, 95{112. , \Monetary Targeting in Germany," in Iwao Kuroda, ed., Towards More Effective Monetary Policy, London: MacMillan Press, 1997. , \Geldwerstabilität: Bedrohung und Bewährung," in Deutsche Bundesbank, ed., Fünfzig Jahre Deutsche Mark: Notenbank und Währung in Deutschland seit 1948, C H Beck, 1998. Niskanen, William, Bureaucracy and Representative Government, Chicago: Aldine, 1971. Orphanides, Athanasios and Volker Wieland, \Price Stability and Monetary Policy Effectiveness when Nominal Interest Rates are Bounded at Zero," Mimeo, Board of Governors of the Federal Reserve System, Washington, D.C. 1998. Persson, Torsten, Gérard Roland, and Guido Tabellini, \Separation of Powers and Accountability: Towards a Formal Approach of Comparative Politics," Discussion Paper 1475, CEPR, London 1996. Rogo, Kenneth, \The Optimal Degree of Commitment to an Intermediate Target," Quarterly Journal of Economics, 1985, 100, 1169{1190. and Anne Sibert, \Elections and Macroeconomic Policy Cycles," Review of Economic Studies, 1988, 55, 1{16. Svensson, Lars E.O., \Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts," American Economic Review, 1997, 87, 98{114. Vaubel, Roland, \The Bureaucratic and Partisan Behavior of Independent Central Banks: German and International Evidence," European Journal of Political Economy, 1997, 13, 201{224. Walsh, Carl E., \Optimal Contracts for Central Bankers," American Economic Review, 1995, 85, 150{167.
URI:	http://wrap.warwick.ac.uk/id/eprint/1658

Request changes to a record

Actions (login required)

View Item