On the Sources of the Inflation Bias and Output Variability
23 Pages Posted: 4 Feb 2005
Date Written: December 2004
Abstract
Why do dynamic inconsistencies in monetary policy exist? In this paper a traditional model without put inefficiencies is introduced, but monetary policy is allowed to be influenced by the various constituencies in the economy, that pressure Congress in turn to pressure the central bank to adopt a particular policy stance. The paper shows that in this economy an inflation bias arises due to the lobbying pressures of outsiders. Furthermore, it shows that if lobbying pressures are high enough, an inflation bias cannot be avoided for any finite level of central bank independence. It also shows that introducing the realistic feature of lobbying pressures has an impact on the stabilization properties of monetary policy. When a supply shock occurs, the shock is totally absorbed by a non myopic trade union which has no lobbying costs. This is independent of any finite degree of conservativeness of the central banker, who has to accept an extreme increase in price instability. It is shown that monetary policy delegation is therefore sub-optimal in achieving price-stability compared to labor-market reforms meant to remove monopsonistic elements. However, the same structural policies will induce greater output instability by strengthening the power of conservative central bankers.
JEL Classification: E52, E58, E31
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Central Bank Independence: An Update of Theory and Evidence
By Helge Berger, Jakob De Haan, ...
-
Why Does Inflation Differ Across Countries?
By Marta Campillo and Jeffrey A. Miron
-
Central Bank Credibility: Why Do We Care? How Do We Build it?
-
Central Bank Independence and Disinflationary Credibility: A Missing Link?
-
Central Bank Autonomy: Lessons from Global Trends
By Marco Arnone, Bernard Laurens, ...
-
By Luis I Jácome and Francisco Vázquez
-
Central Bank Independence and Monetary Policymaking Institutions - Past Present and Future
-
By Tonny Lybek
-
The Measurement of Central Bank Autonomy: Survey of Models, Indicators, and Empirical Evidence
By Marco Arnone, Bernard Laurens, ...