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Non-benevolent central banks

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  • Lambsdorff, Johann
  • Schinke, Michael

Abstract

Corruption at central banks induces distorted policies by generating a tendency to increase inflation. An inflation bias arises because the public distrusts central bank's benevolence, not only its commitments. We show that distrust among the public, measured by a high level of expected inflation, can have positive effects because it may sanction a conservative central banker, forcing him to lower realized inflation levels. Giving central banks a high level of independence will fail if this not only insulates central bankers from troublesome political interference but also provides them with the leeway necessary to carry out corrupt transactions.

Suggested Citation

  • Lambsdorff, Johann & Schinke, Michael, 2002. "Non-benevolent central banks," University of Göttingen Working Papers in Economics 16, University of Goettingen, Department of Economics.
    • Handle: RePEc:zbw:cegedp:16
    as

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    References listed on IDEAS

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    1. Hellman, Joel S. & Jones, Geraint & Kaufmann, Daniel & Schankerman, Mark, 2000. "Measuring governance, corruption, and State capture - how firms and bureaucrats shape the business environment in transition economies," Policy Research Working Paper Series 2312, The World Bank.
    2. Mulligan, Casey B & Sala-I-Martin, Xavier X, 1997. "The Optimum Quantity of Money: Theory and Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 687-715, November.
    3. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(4), pages 1169-1189.
    4. Wintrobe, Ronald & Breton, Albert, 1986. "Organizational Structure and Productivity," American Economic Review, American Economic Association, vol. 76(3), pages 530-538, June.
    5. Lambsdorff, Johann Graf, 2002. "Making corrupt deals: contracting in the shadow of the law," Journal of Economic Behavior & Organization, Elsevier, vol. 48(3), pages 221-241, July.
    6. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-167, March.
    7. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    Cited by:

    1. Frisell, Lars & Roszbach, Kasper & spagnolo, giancarlo, 2008. "Governing the Governors: A Clinical Study of Central Banks," Working Paper Series 221, Sveriges Riksbank (Central Bank of Sweden).
    2. Raphael Solomon, 2005. "Pocket Banks and Out-of-Pocket Losses: Links between Corruption and Contagion," Staff Working Papers 05-23, Bank of Canada.

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    More about this item

    Keywords

    Corruption; central banks; time-inconsistency; inflation bias; seignorage; central bank independence;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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