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
JEL(s): E52, E58
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.