Central bank financial strength and inflation: an empirical reassessment considering the key role of the fiscal support

Abstract : This paper re-examines whether weak central bank finances affect inflation by scrutinizing the key rationale for such a relationship: that the absence of Treasury support makes central bank finances relevant for price stability. Specifically, I ask whether central banks which are not likely to enjoy fiscal support when needed experience higher inflation as their inflation as their financial situation deteriorates. I find this to be true among a large sample of 82 countries between 1998 and 2008. De facto potential fiscal support appears relevant, while de jure fiscal support, which I survey analyzing 82 central bank laws, does not appear to matter. No link is found in a general context. The results bring forward an explanation for the conflicting results of the previous empirical studies, which neglected this key component.
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Submitted on : Monday, December 11, 2017 - 3:20:48 PM
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Julien Pinter. Central bank financial strength and inflation: an empirical reassessment considering the key role of the fiscal support. 2017. ⟨halshs-01660945⟩

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