Debt, Inflation and Central Bank Independence
Consider aligning the central bank''s objectives closer to the preferences of society and away from those of a non-benevolent government. Although this reform would be socially beneficial and initially succeed in reducing inflation, it would fail to lower inflation permanently. The smaller anticipated policy distortions implemented by a more independent central bank would induce the fiscal authority to trade-off higher current deficits for lower future deficits. In the long run, inflation would increase to accommodate a higher public debt. Alternatively, imposing a strict inflation target would lower inflation permanently and insulate the primary deficit from political distortions.