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
Date Written: May 15, 2014
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: Suggested Citation