Central Bank Independence and the Trade-Off Between Inflation and Ouput Stabilization

Thomas J. Jordan

Journal of Institutional and Theoretical Economics (JITE), 1997, vol. 153, issue 2, 367-

Abstract: This paper provides a monetary game model in which the short-run Phillips curve depends on the average inflation rate. Three main results are obtained: First, discretionary monetary policy not only leads to an inflation bias but also to an output stabilization bias. Second, a more independent central bank does not necessarily lead to lower output stabilization. Third, there is a lower bound for a reasonable choice of the degree of central bank independence. A central bank with less independence than the lower bound impairs both the inflation and the output stabilization goal of the government.

JEL-codes: E31 E32 E52 E58 (search for similar items in EconPapers)
Date: 1997
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