Inflation Culture, Central Bank Independence and Price Stability

European Journal of Political Economy

Posted: 9 Apr 1998

See all articles by Bernd Hayo

Bernd Hayo

University of Marburg - School of Business & Economics

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Note: The following is a description of the paper, and not the actual abstract as it appeared in the journal.

An important mainstream macroeconomic explanation of differences in inflation rates between countries, here coined the ?orthodox' view, emphasises the independence of the central bank as central in this respect. While the story supporting the case for independent central banks as causes for low inflation might be considered quite strong, it is argued in this paper that the observed evidence in favour of the orthodox view can be interpreted somewhat differently.

The ?alternative view' presented here is based on the idea that institutions are developed according to certain preferences of a society. Only if a social consensus with respect to supporting an independent central bank exists will, at least in a democratic society, such an institution be able to perform its task. Though it is difficult to make a totally convincing case for the alternative view using empirical evidence, the attempt has been made to investigate the existence of differing stability preferences within the countries of the European Community. Using survey data collected over the period 1976-1993 in the EC member states, an empirical sensitivity indicator for the inflation awareness in these countries is obtained.

It can be shown that these sensitivity indicators are able to explain the differing average inflation rates in the EC countries to the same - or even larger extent - than the measures for central bank independence presented by the supporters of the orthodox view. It is argued therefore that it is not central bank independence which ultimately causes inflation rates to be low, but the preferences of people towards monetary stability.

JEL Classification: E42, E31

Suggested Citation

Hayo, Bernd, Inflation Culture, Central Bank Independence and Price Stability. European Journal of Political Economy. Available at SSRN:

Bernd Hayo (Contact Author)

University of Marburg - School of Business & Economics ( email )

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Marburg, D-35032
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