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Central Bank Independence and the `Free Lunch Puzzle': A New Perspective

al-Nowaihi, A, Levine, P and Mandilaras, A Central Bank Independence and the `Free Lunch Puzzle': A New Perspective .

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A new perspective is provided on a puzzle that has emerged from the empirical lit- erature suggesting that government-independent central banks provide a `free lunch': lower in°ation is apparently achieved at no cost in terms of greater output variance. We assess the various explanations provided by the theoretical literature. After revis- iting the free lunch puzzle and con¯rming the empirical importance of open-economy effects, we develop a Rogoff-style delegation model that combines the latter with po- litical monetary cycle e®ects. We show that if all countries delegate monetary policy to government independent banks, as economies become more integrated then a low inflation, higher output variance trade-off re-emerges.

Item Type: Other
Divisions : Surrey research (other units)
Authors :
al-Nowaihi, A
Mandilaras, A
Uncontrolled Keywords : C72, E61., central bank independence, open economy, political uncertainty
Depositing User : Symplectic Elements
Date Deposited : 16 May 2017 15:14
Last Modified : 23 Jan 2020 10:26

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