Debt, Inflation and Central Bank Independence

FRB of St. Louis Working Paper No. 2013-017D

32 Pages Posted: 30 May 2013 Last revised: 8 Aug 2014

See all articles by Fernando M. Martin

Fernando M. Martin

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: May 15, 2014

Abstract

Consider aligning the central bank's objectives closer to the preferences of society and away from those of a non-benevolent government. Although this reform would be socially beneficial and initially succeed in reducing inflation, it would fail to lower inflation permanently. The smaller anticipated policy distortions implemented by a more independent central bank would induce the fiscal authority to trade-off higher current deficits for lower future deficits. In the long run, inflation would increase to accommodate a higher public debt. Alternatively, imposing a strict inflation target would lower inflation permanently and insulate the primary deficit from political distortions.

Keywords: government debt, inflation, deficit, central bank independence, time-consistency, inflation targeting

JEL Classification: E52, E58, E61, E62

Suggested Citation

Martin, Fernando M., Debt, Inflation and Central Bank Independence (May 15, 2014). FRB of St. Louis Working Paper No. 2013-017D, Available at SSRN: https://ssrn.com/abstract=2271816 or http://dx.doi.org/10.2139/ssrn.2271816

Fernando M. Martin (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

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Saint Louis, MO 63011
United States
314-444-7350 (Phone)

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