Abstract
AbstractWe model a two‐party representative democracy with citizen‐candidate in which the leader is elected while the central‐banker is appointed by the leader. Assuming that fiscal policy is ‘more important’ than monetary policy, we show that, if some individuals who dislike inflation get organized in a lobby and offer campaign contribution to the party that proposes a zero‐inflation policy, then even if the majority of the population, as well as the majority of party‐members, favour inflation, no inflation results in equilibrium. The paper provides a political economy explanation of the role played by financial interest groups in providing political support to anti‐inflationary monetary policy. Copyright © 2004 John Wiley & Sons, Ltd.
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