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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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Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...
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) | ||||
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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: |
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Number: | No.515 | ||||
Number of Pages: | 21 | ||||
Status: | Not Peer Reviewed | ||||
Access rights to Published version: | Open Access (Creative Commons) | ||||
Funder: | Sonderforschungsbereich 303 -- "Information und die Koordination wirtschaftlicher Aktivitäten" |
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