Society, Government, and Central-Bank Independence

This paper reexamines the inflation bias of time-inconsistent monetary policy. A benevolent government can eliminate the bias by using two policy instruments, instead of one. However, the time-inconstistency result can be kept formally, provided a non-benevolent government has the private interest of preserving the level of distortionary regulation and of collecting the inflation tax. Such government has no use for normative solutions of the inflation problem. The paper also presents a positive theory of central-bank independence. Goal independence should be difined as the right for bankers of choosing target values. On the hypothesis that the bakers; non-pecuniary payoff depends on expected inflation, they will deliver zero inflation.