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Institutional Arrangements and Inflation Bias: A Dynamic Heterogeneous Panel Approach
E21 - Consumption; Saving
E60 - General
F40 - General
The paper investigates whether the institutional arrangements that determine the conduct of monetary policy and prudential regulation and supervision of the banking system influence policymakers’ actions in pursuing their designated mandates. Employing recently developed dynamic heterogeneous panel methods and using data for 25 industrialised countries from 1960 to 2018, we empirically assess whether central banks’ main objective of inflation stability is compromised when assigned with both policy mandates manifested as inflation bias. Our results show that, once we appropriately control for relevant policy and institutional factors, the separation of prudential policy and monetary policy does not have a significant effect on inflation outcomes.