December 1, 2005.
NOTE: At the time of publication, the author Eduardo Zambrano was not yet affiliated with Cal Poly.
What if it could be possible to convince a completely non-neoclassical economist of the importance of Central Bank independence? The profession currently favors arguments in favor of Central Bank independence that are based on the seminal work by Barro and Gordon (1983 a,b), a model with naturally strong neoclassical assumptions. As a consequence of this, the argument in favor of Central Bank independence routinely given by economists is often not bought by those who question the validity of the neoclassical assumptions. In this paper I argue that Central Bank independence can be beneficial for society even when the economy is entirely non-neoclassical, that is, when workers are all unionized, firms are completely cartelized and inflation arises as the result of distributive struggles among capitalists and workers. This is so because it is the time-inconsistency issue, and not the structure of the economy, that which generates the inflation bias that Central Bank independence is set to eliminate.
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