Seminario 14/28: J.C. Negrete (UMU) – Distortionary Taxation and Central Bank Design in Monetary Union

Información

ABSTRACT:

We consider a monetary union where discretionary monetary policy creates the classical inflation bias. We analyze how the design of the central bank interacts with fiscal policy under distortionary taxation. We show that when countries share a single currency the perils of not having a conservative enough central bank are more severe. This result rationalizes the common perception that, in comparison with the Federal Reserve, the European Central Bank is more worried about getting inflation out of control. Finally, when an economic crisis creates the need for a more costly welfare state in some member countries (periphery), it is in all the countries’ interest to make their central bank more conservative.