Abstract
A Nonnormative Theory of Inflation and Central Bank Independence. - The authors study monetary policy under different central bank constitutions when the labor-market insiders set the minimal wage so that the outsiders are involuntarily unemployed. If the insiders are in the majority, the representative insider will be the median voter. The authors 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 their theory are consistent with the evidence that central bank independence decreases average inflation and inflation variabil-ity, but does not affect employment variability.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 315-333 |
| Number of pages | 19 |
| Journal | Weltwirtschaftliches Archiv |
| Volume | 136 |
| Issue number | 2 |
| State | Published - 2000 |
| Externally published | Yes |
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ASJC Scopus subject areas
- Business, Management and Accounting(all)
Cite this
A Nonnormative Theory of Inflation and Central Bank Independence. / Herrendorf, Berthold; Neumann, Manfred J M.
In: Weltwirtschaftliches Archiv, Vol. 136, No. 2, 2000, p. 315-333.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - A Nonnormative Theory of Inflation and Central Bank Independence
AU - Herrendorf, Berthold
AU - Neumann, Manfred J M
PY - 2000
Y1 - 2000
N2 - A Nonnormative Theory of Inflation and Central Bank Independence. - The authors study monetary policy under different central bank constitutions when the labor-market insiders set the minimal wage so that the outsiders are involuntarily unemployed. If the insiders are in the majority, the representative insider will be the median voter. The authors 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 their theory are consistent with the evidence that central bank independence decreases average inflation and inflation variabil-ity, but does not affect employment variability.
AB - A Nonnormative Theory of Inflation and Central Bank Independence. - The authors study monetary policy under different central bank constitutions when the labor-market insiders set the minimal wage so that the outsiders are involuntarily unemployed. If the insiders are in the majority, the representative insider will be the median voter. The authors 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 their theory are consistent with the evidence that central bank independence decreases average inflation and inflation variabil-ity, but does not affect employment variability.
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UR - http://www.scopus.com/inward/citedby.url?scp=0034415897&partnerID=8YFLogxK
M3 - Article
AN - SCOPUS:0034415897
VL - 136
SP - 315
EP - 333
JO - Review of World Economics
JF - Review of World Economics
SN - 1610-2878
IS - 2
ER -