This paper presents an interest group theory of central bank independence. The theory is grounded in the concept of … unanticipated burst of inflation that unravels many interest group deals. The interest groups then have to return to the politicians …, while politicians can benefit from creating unanticipated inflation, they benefit even more by credibly precommiting not to …

independent central bank in place, politicians have an incentive to create unexpected bursts of inflation that disrupt interest … group deals previously negotiated. In the face of such inflation, the interest groups have to return to the politicians to …. However, politicians, ex ante, would prefer not to face the temptation to extract rents through inflation. The reason is that …

-bias arises due to the lobbying pressures of outsiders. Furthermore, we show that if lobbying pressures are high enough, an … feature of lobbying pressures has an impact on the stabilization properties of monetary policy. When a supply shock occurs …, the shock is totally absorbed by a forward-looking trade-union which has no costs of lobbying, independently of any finite …

Inflation in advanced economies is low by historical standards but there is no threat of deflation. Slower economic … growth is caused by supply-side constraints rather than low inflation. Below-the-target inflation does not damage the … reputation of central banks. Thus, central banks should not try to bring inflation back to the targeted level of 2%. Rather, they …

According to the game-theoretic model of monetary policy, inflation is the consequence of time-inconsistent behavior of … the monetary authority. The inflation bias can be eased by handing over the responsibility for monetary policy to an … sample of 11 OECD countries. -- Central Banking ; Conservatism ; Central Bank Independence ; Inflation …