Template-Type:ReDIF-Paper 1.0  
Title: A Non-normative Theory of Inflation and Central Bank Independence
Author-Name: Herrendorf, Berthold
Author-Name: Manfred J. M. Neumann
Classification-JEL: E52, E58
Keywords: central bank independence, inflation bias, insiders, median voter, political cycles.
Abstract: We study monetary policy when the labor-market insiders set the wage so that the outsiders are
	involuntarily unemployed. If the insiders are in the majority, the representative insider will be the median voter.
	Consequently, neither an independent nor a government-dependent central banker is found to produce a
	systematic inflation bias, albeit equilibrium employment is too low from a social welfare point of view. The
	disadvantage of government-dependence is that the central bank takes the government's reelection prospects
	into account and creates a political cycle in inflation. Our theory is consistent with the main stylized facts that a
	higher degreee of central bank independence decreases average inflation and inflation variability, but does not
	affect output variability.
Length: pages
Creation-Date: 1997-01
Revision-Date: 
Handle: RePEc:bon:bonsfb:400