Inflation Culture, Central Bank Independence and Price Stability

Abstract

This paper proposes that central bank independence alone is insufficient to explain low inflation. It argues instead that central bank independence may be interconnected with public attitudes towards inflation via a historical feedback process that has led to an anti-inflation culture and public consensus on monetary stability in countries with low inflation rates. Using survey data from European Community members over the period 1976-1993, I find supportive evidence of the existence of a stability culture in low-inflation countries. In their assessment of the importance of price stability, people living in countries with a low inflation record appear to be more sensitive to an increase in the actual inflation rate than people in higher-inflation countries.