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Money Financed Deficits, Central Bank Reform and Inflation Persistence:Evidence from Selected European Countries

Athanasios Papadopoulos () and Moise Sidiropoulos

Ekonomia, 2004, vol. 7, issue 1, 1-17

Abstract: This paper develops an inflation persistence model and provides theoretical arguments that low inflation persistence may be achieved either by a central bank reform or by a hard pegging exchange rate vis-\`{a}-vis a low inflation country. Our theoretical analysis states that both the decrease in the monetary financing of the budget deficit (or the economic independence of the central bank) and the hard pegging of the exchange rate lead to a fall in the inflation persistence. These arguments are supported by empirical evidence provided by five selected European countries: Greece, Italy, Portugal, Spain and France. In this paper the most likely date for the change in the policy regime is detected by a procedure based upon the recent work of Perron (1997), where the null hypothesis of a unit root is set against the alternative of stationarity about a single broken trend line. Our results confirm that central bank reform significantly affects the inflation persistence in the countries under examination.

JEL-codes: E31 E42 E58 C22 (search for similar items in EconPapers)
Date: 2004
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