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:	21
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Funder:	Sonderforschungsbereich 303 -- "Information und die Koordination wirtschaftlicher Aktivitäten"

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