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

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  • Thomas J. Jordan

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.

Suggested Citation

  • Thomas J. Jordan, 1997. "Central Bank Independence and the Trade-Off Between Inflation and Ouput Stabilization," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 153(2), pages 367-367, June.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(199706)153:2_367:cbiatt_2.0.tx_2-x
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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