DP1297 Reciprocity and Inflation in Federal Monetary Unions
|Author(s):||Jürgen von Hagen|
|Publication Date:||November 1995|
|Keyword(s):||Central Banks, Inflation, Monetary Union, Political Economy|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=1297|
This paper presents a model of monetary policy-making in a federal monetary union. Central bank council members are representatives from the member states. In a repeated-game context, council members have an incentive to engage in strategic voting, trading political favours between each other. The paper shows that a reciprocity-equilibrium exists in the repeated bargaining game. Reciprocity induces a positive inflation bias and nominal fluctuations in the monetary union.