Economic reforms and the indirect role of monetary policy

Andrea Beccarini

Applied Economics Letters, 2013, vol. 20, issue 5, 432-435

Abstract: Due to pressure from some lobbies, the government is unwilling to perform structural reforms. The probability of its re-election depends, however, on a positive business cycle. The central bank may create surprise deflation even though it maximizes the public's utility function and even if it faces a rational market. This may explain why the European Central Bank (ECB), but not the US Federal Reserve (FED), is found to be unaffected by the inflation bias.

Date: 2013
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DOI: 10.1080/13504851.2012.709598

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