Fiscal Policy Restrictions on Inflation Targeting: A Political Economy Approach

Hernando Vargas H. () and Yanneth Betancourt ()
Authors registered in the RePEc Author Service: Hernando Vargas-Herrera

Revista Desarrollo y Sociedad, 2010

Abstract: Fiscal policy may impose restrictions on Inflation Targeting when Central Bank Independence (cbi) is institutionally weak and society has a real exchange rate target that is highly valued. In this environment, fiscal policy constrains the decisions of a committed, independent Central Bank (cb) regarding inflation. When such a pressure is strong enough to threaten cbi, monetary authorities react by setting an inflation target that differs from the one that would prevail in the absence of those threats. A simple model is used to illustrate this point where the cb takes into account the probability of survival as an independent institution.

Keywords: central bank independence; fiscal policy restrictions; inflation targeting. (search for similar items in EconPapers)
JEL-codes: E52 E58 E63 (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:col:000090:008777

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