AN EQUILIBRIUM-ANALYSIS OF CENTRAL BANK INDEPENDENCE AND INFLATION

A dynamic equilibrium model is constructed to analyse the implications of different degrees of central bank independence. In the main model, agents are permitted to vote on the desired inflation and labour taxe s to finance government Spending. Multiple perfect-foresight equilibri a arise, and one of them exhibits fluctuations in output, investment, and the inflation rates as a result of permitting agents to vote. If, instead of having agents vote each period on these parameters, inflati on and labour taxes in the model are set at fixed levels, these fluctu ations do not arise, and a lower inflation rate can appear.