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

Published online by Cambridge University Press:  06 April 2004

ANDREW HUGHES HALLETT
ANDREW HUGHES HALLETT
Affiliation:
Cardiff University and CEPR
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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.

Keywords

Central Bank IndependenceInflation–Output Trade-offPolitical Uncertainty
Type
Research Article
Information
Macroeconomic Dynamics , Volume 8 , Issue 2 , April 2004 , pp. 207 - 225
Copyright
© 2004 Cambridge University Press

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