Abstract

HERNANDO VARGAS, Yanneth Rocío Betancourt. Fiscal Policy Restrictions on Inflation Targeting: A Political Economy Approach*. Desarro. soc. [online]. 2010, n.65, pp.171-190. ISSN 0120-3584.

Fiscal policy may impose restrictions on Inflation Targeting when Central Bank Independence (CBI) is institutionally weak and society has a real exchange rate target that is highly valued. In this environment, fiscal policy constrains the decisions of a committed, independent Central Bank (CB) regarding inflation. When such a pressure is strong enough to threaten CBI , monetary authorities react by setting an inflation target that differs from the one that would prevail in the absence of those threats. A simple model is used to illustrate this point where the CB takes into account the probability of survival as an independent institution.

Keywords : Central bank independence; fiscal policy restrictions; inflation targeting.

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