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

27 Pages Posted: 3 Jan 2013

See all articles by Valeriya Dinger

Valeriya Dinger

Universität Osnabrück

Sven Steinkamp

Universität Osnabrück - Institute of Empirical Economic Research

Frank Westermann

University of Osnabrueck - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Date Written: December 28, 2012

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 of fragmented monetary policy and changing policy objectives among the national central banks in the euro area. 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

JEL Classification: E520, E580, H410

Suggested Citation

Dinger, Valeriya and Steinkamp, Sven and Westermann, Frank, The Tragedy of the Commons and Inflation Bias in the Euro Area (December 28, 2012). CESifo Working Paper Series No. 4036. Available at SSRN: https://ssrn.com/abstract=2195502

Valeriya Dinger

Universität Osnabrück ( email )

Neuer Graben
Osnabrück, 49074
Germany

Sven Steinkamp

Universität Osnabrück - Institute of Empirical Economic Research ( email )

Barbarastr. 12
Osnabrueck, 49076
Germany

Frank Westermann (Contact Author)

University of Osnabrueck - Department of Economics ( email )

Rolandstr. 8
Osnabrueck, D-49069
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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