A CENTRAL BANK FOR ALL SEASONS? THE “LOWER INFLATION AT NO COST” PROPOSITION UNDER CONDITIONS OF POLITICAL UNCERTAINTY

Andrew Hughes Hallett

Macroeconomic Dynamics, 2004, vol. 8, issue 2, 207-225

Abstract: Recent literature on independent and conservative Central Banks has highlighted the possibility of achieving lower inflation for no increase in the volatility of output—especially when political influences are taken into account. We extend this idea to allow for political uncertainty, where political parties get elected with a probability that may vary over time. We find that it is no longer possible to guarantee lower inflation at no cost at all times. But it is possible to guarantee one or other property if the bank is very conservative or if the governments are always liberal. That implies a conventional inflation–output stability trade-off. However, it is also possible to have conditions in which neither property applies.

Date: 2004
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