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Articles • Rev. Bras. Econ. 74 (4) • Oct-Dec 2020 • https://doi.org/10.5935/0034-7140.20200020   copy

Elections, heterogeneity of central bankers and inflationary pressure: The case for staggered terms for the president and the central banker* * The views expressed in this paper are those of the authors and do not necessarily reflect those of the Banco Central do Brasil or of the University of Brasilia. The present version of this paper was concluded while Mauricio Bugarin was visiting the Political Science Department of the University of Vanderbilt. Bugarin is grateful to FAP-DF for the financial support [No. 00193.00002099/2018-65] that allowed for that post-doctoral research and for the overall research support of the Political Science Department at Vanderbilt University. Bugarin also acknowledges the research support by the Conselho Nacional de Desenvolvimento Científico e Tecnológico. The authors are grateful to the participants of the XX Annual Inflation Targeting Seminar of the Banco Central do Brasil, the 18th International Conference on Game Theory (Stony Brook), the Third World Congress of the Game Theory Society and most especially to Eurilton Araujo, Shiv Dixit, Marcelo Moura, Flavio Versiani, Carlos Viana and an anonymous referee for insightful comments and discussions on the present or past versions of this research.

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Abstract

This paper analyzes a signaling model of monetary policy when inflation targets are not set by the monetary authority. The most important implication of the model’s solution is that a higher ex-ante dispersion in central bankers’ preferences, referred to as heterogeneity in policy orientation, increases the signaling cost of commitment to inflation targets. The model allows for a comparison of two distinct institutional arrangements regarding the tenure in office of the central banker and the head of government. We find that staggered terms yield superior equilibria when opportunistic political business cycles can arise from presidential elections. This is a consequence of a reduction of information asymmetry about monetary policy, and gives theoretic support to the observed practice of staggered terms among independent central banks.

Keywords
elections; inflation targeting; exogenous inflation targets; credibility; central bank heterogeneity; opportunistic political business cycles on inflation; staggered terms

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