Working Paper: CEPR ID: DP1297
Authors: Jurgen von Hagen
Abstract: This paper presents a model of monetary policy-making in a federal monetary union. Central bank council members are representatives from the member states. In a repeated-game context, council members have an incentive to engage in strategic voting, trading political favours between each other. The paper shows that a reciprocity-equilibrium exists in the repeated bargaining game. Reciprocity induces a positive inflation bias and nominal fluctuations in the monetary union.
Keywords: monetary union; central banks; political economy; inflation
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strategic voting behavior of council members (D72) | positive inflation bias (E31) |
| more conservative council members (D72) | larger inflation bias (E31) |
| shortening appointment period for council members (G34) | reduction in inflation bias (E31) |