Political Support to Anti-Inflationary Policies

In the last 20 years, central bank independence has been indicated as the institutional arrangement able to eliminate the inflationary bias problem. This concept has inspired the institutional structure of the European Central Bank, whose primary objective is to preserve price stability, independently from output stabilization goals. The theoretical basis of such a statement relies on a model of inflationary bias "a la Barro and Gordon, in which inflation bias is due to the assumption that the central bank is guided by social welfare considerations, which lead to a target for output higher than the natural level. The weakness of such an approach derives from the fact that the assumed objective function of the monetary authorities lacks microeconomic and micropolitical foundations.The political economy literature, departing from the standard assumption of representative-agent, sheds light on the fact that monetary policy choices should be analysed by looking at the political conflict over redistributive inflation. In this paper we take this view by recognizing that policy outcomes depend on how the political process resolves the redistributive conflict between individuals for and against inflation. Our key idea is that the political conflict should be seen as bi-dimensional: on the one side differences in asset holdings determine preferences over inflation; on the other side differences in income determine preferences over the level of taxation and the level of public transfer. The level of inflation is decided by monetary policy, whereas the last two variables are controlled by fiscal policy. In this framework the political outcome might be very far from the one predicted by majority voting. Namely, political outcomes on the dimension perceived as less relevant might be decided by minority groups.