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The Tragedy of the Commons and Inflation Bias in the Euro Area

Valeriya Dinger, Sven Steinkamp () and Frank Westermann

No 94, IEER Working Papers from Institute of Empirical Economic Research, Osnabrueck University

Abstract: Central bank credit has expanded dramatically in some of the euro area member countries since the beginning of the financial crisis. This paper makes two contributions to understand this stylized fact. First, we discuss a simple model of monetary policy that includes (i) a credit channel and (ii) a common pool problem in a monetary union. We illustrate that the interaction of the two elements leads to an inflation bias that is independent of the standard time-inconsistency bias. Secondly, we present empirical evidence that is consistent with the view that national central banks in the euro area have indeed followed an independent monetary policy. We show that after 2007, central bank credit has been highly correlated with unemployment, but not with inflation in the respective countries.

Keywords: Tragedy of the Commons; Inflation Bias; Credit Channel; TARGET2; Euro Area (search for similar items in EconPapers)
JEL-codes: E52 E58 H41 (search for similar items in EconPapers)
Pages: 26
Date: 2012-11-30
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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Related works:
Journal Article: The Tragedy of the Commons and Inflation Bias in the Euro Area (2014) Downloads
Working Paper: The Tragedy of the Commons and Inflation Bias in the Euro Area (2012) Downloads
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