Debt,inflation and central bank independence |
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| Institution: | 1. Universidad de Santiago de Chile, Santiago, Chile;2. Universidad Torcuato Di Tella, Buenos Aires, Argentina;3. European Central Bank, Frankfurt, Germany;1. emlyon business school, 23 avenue Guy de Collongue, Écully 69130, France;2. ETH Zurich, Switzerland;3. SciencesPo, 28, rue des Saints Pères, 75007 Paris, France;4. CNRS, France;5. OFCE, France;1. University of Mannheim, Department of Economics, L7, 3–5, Mannheim 68131, Germany;2. Bank of England, Threadneedle Street, London EC2R 8AH, United Kingdom;1. University of Essex, UK;2. Nova School of Business and Economics, Portugal |
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| Abstract: | Increasing the independence of a central bank from political influence, although ex-ante socially beneficial and initially successful in reducing inflation, would ultimately fail to lower inflation permanently. The smaller anticipated policy distortions implemented by a more independent central bank would induce the fiscal authority to decrease current distortions by increasing the deficit. Over time, inflation would increase to accommodate a higher public debt. By contrast, imposing a strict inflation target would lower inflation permanently and insulate the primary deficit from political distortions. |
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| Keywords: | Government debt Inflation Deficit Central bank independence Time-consistency Inflation targeting |
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