Patience and Inflation

Hübner, Malte and Vannoorenberghe, Gonzague (2015): Patience and Inflation.

Abstract

Monetary policy makers constantly face an inter-temporal choice problem. By gener- ating surprise inflation they can temporarily increase employment and output. These short-run gains have however to be weighed against the long-run costs associated with higher inflation and a loss of reputation. More patient countries should therefore choose to implement lower inflation. Using cross-country data for up to 88 advanced and emerging economies, we provide empirical evidence that more patient countries had indeed lower average inflation rates over our sample period from 1961 to 2009. To address the possibility that patience may be endogenous to past inflation rates we use information on how the language spoken in a country encodes future time as an instrument for patience. Our results show that patience has a statistically and economically significant impact on inflation.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation, Patience, Stability Culture
• Subjects: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D72 - Political Processes: Rent-Seeking, Lobbying, Elections, Legislatures, and Voting Behavior; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; Z - Other Special Topics > Z1 - Cultural Economics ; Economic Sociology ; Economic Anthropology > Z13 - Economic Sociology ; Economic Anthropology ; Social and Economic Stratification

References

Alberto Alesina and Lawrence H Summers. Central Bank Independence and Macroe- conomic Performance: Some Comparative Evidence. Journal of Money, Credit and Banking, 25(2):151–162, 1993.

Marco Arnone, Bernard J Laurens, Jean-François Segalotto, and Martin Sommer. Central Bank Autonomy: Lessons from Global Trends. IMF Staff Papers, 56(2):263–296, September 2008.

Robert J Barro and David B Gordon. A Positive Theory of Monetary Policy in a Natural Rate Model. The Journal of Political Economy, 91(4):589–610, 1983a.

Robert J. Barro and David B. Gordon. Rules, discretion and reputation in a model of monetary policy. Journal of Monetary Economics, 12(1):101–121, 1983b.

Helge Berger, Jakob de Haan, and Sylvester W.C. Eijffinger. CBI - an update of theory and evidence. 2000.

Peter Bofinger, Carsten Hefeker, and Kai Pfleger. Stabilitätskultur in Europa: Theoretische Grundlagen, empirische Befunde, Bedeutung für die EWU. Deutscher Sparkassenverlag, Stuttgart, 1998.

Lera Boroditsky. How Language Shapes Thought. Scientific American, (February):63–65, 2011.

Clive B. Briault. The costs of inflation. 1995.

Marta Campillo and Jeffrey A. Miron. Why does inflation differ across countries? Working Paper 5540, National Bureau of Economic Research, April 1996.

Keith M. Chen. The effect of language on economic behavior: Evidence from savings rates, health behavior, and retirement assets. American Economic Review, 103(2), 2013.

Richard Clarida, Jordi Gali, and Mark Gertler. The Science of Monetary Policy: A New Keynesian Perspective. Journal of Economic Literature, 37(4):1661–1707, December 1999.

Christopher Crowe and Ellen E Meade. The Evolution of Central Bank Governance around the World. Journal of Economic Perspectives, 21(4):69–90, December 2007.

Alex Cukierman. Central Bank Strategy, Credibility, and Independence: Theory and Evi- dence. The MIT Press, Camebridge, Massachusetts, 1992. Alex Cukierman, Steven B. Webb, and Bilin Neyapti. Measuring the Independence of Central Banks and Its Effect on Policy Outcomes. The World Bank Economic Review, 6(3):353–398, 1992.

Thomas Dohmen, Benjamin Enke, Armin Falk, David Huffman, and Uwe Sunde. Patience and the Wealth of Nations. 2015. Stanley Fischer. Modern approaches to central banking. Working Paper 5064, National Bureau of Economic Research, March 1995. 26

Shane Frederick. Cognitive Reflection and Decision Making. Journal of Economic Perspectives, 19(4):25–42, December 2005.

Shane Frederick, George Loewenstein, and Ted O’Donoghue. Time Discounting and Time Preference: A Critical Review. Journal of Economic Literature, XL(June 2002):351–401, 2002.

Jordi Gali and Mark Gertler. Inflation dynamics: A structural econometric analysis. Jour- nal of Monetary Economics, 44(2):195–222, October 1999. Atish R. Ghosh, Anne-Marie Gulde, Jonathan D. Ostry, and Holger C. Wolf. Does the Nominal Exchange Rate Regime Matter? NBER Working Papers 5874, National Bureau of Economic Research, Inc, January 1997.

Bart H.H Golsteyn, Hans Grönqvist, and Lena Lindahl. Adolescent Time Preferences Predict Lifetime Outcomes. The Economic Journal, 124(580):F739–F761, 2014.

Vittorio Grilli, Donato Masciandaro, and Guido Tabellini. Institutions and policies Polit- ical and monetary institutions and public financial policies in the industrial countries. Economic Policy, (October):342–392, 1991.

Bernd Hayo. Inflation culture, central bank independence and price stability. European Journal of Political Economy, 14:241–263, 1998.

Geert Hofstede and Michael Minkov. Long versus short-term orientation: new perspectives. Asia Pacific Business Review, 16(4):493–504, 2010.

Malte Hübner and Gonzague Vannoorenberghe. Patience and Long-Run Growth. 2015.

Dean W. Hughes. The Costs of Inflation: An Analytical Overview. Federal Reserve Bank of Kansas City Economic Review, pages 3–14, November 1982.

Tatiana Kirsanova, David Vines, and Simon Wren-Lewis. Inflation Bias with Dynamic Phillips Curves and Impatient Policy Makers. The B.E. Journal of Macroeconomics, 9 (1):1–26, August 2009.

Gilberto Marcheggiano and David Miles. Fiscal multipliers and time preference. 2013. Stephan Meier and Charles Sprenger. Present-Biased Preferences and Credit Card Borrowing. American Economic Journal: Applied Economics, 2(1):193–210, 2010.

Stephan Meier and Charles Sprenger. Discounting financial literacy: Time preferences and participation in financial education programs. Journal of Economic Behavior & Organization, 95:159–174, 2013. 27

Jan-Oliver Menz and Lena Vogel. A Detailed Derivation of the Sticky Price and Sticky Information New Keynesian DSGE Model. Macroeconomics and finance series, Hamburg University, Department Wirtschaft und Politik, July 2009.

M. Minkov and G. Hofstede. Hofstede’s Fifth Dimension: New Evidence From the World Values Survey. Journal of Cross-Cultural Psychology, 43(1):3–14, 2010.

Matthias Neuenkirch. Are public preferences reflected in monetary policy reaction functions? Journal of Macroeconomics, 40:60–68, June 2014.

Manfred J.M. Neumann. Geldwertstabilität: Bedrohung und Bewährung. In Deutsche Bundesbank, editor, Fünfzig Jahre Deutsche Mark. Notenbank und Währung in Deutschland seit 1945 , chapter VI, pages 309–346. C.H. Beck, 1998.

Adam Posen. Central Bank Independence and Disinflationary Credibility: A Missing Link? 1995.

J. M. Powell and C. L. Thyne. Global instances of coups from 1950 to 2010: A new dataset. Journal of Peace Research, 48(2):249–259, April 2011.

Tobias Preis, Moat Helen Susan, Stanley H. Eugene, and Steven R. Bishop. Quantifying the advantage of looking forward. Scientific Reports, 2(350):1–2, 2012.

Marc Oliver Rieger, Mei Wang, and Thorsten Hens. Risk Preferences Around the World. Management Science, Articles i(April):1–12, 2014.

David Romer. Openess and Inflation: Theory and Evidence. The Quarterly Journal of Economics, CVIII(November):869–903, 1993.

Jay C. Shambaugh. The effect of fixed exchange rates on monetary policy. Quarterly Journal of Economics, 119(1):301–352, 2004.

Matthias Sutter, Silvia Angerer, and Daniela Glätzle-Rützler. The effects of language on children’ s intertemporal choices. Technical report, 2013.

Richard Thaler. Irving fisher: Modern behavioral economist. American Economic Review, 87(2):439–41, 1997.

Mei Wang, Marc Oliver Rieger, and Thorsten Hens. An international survey on time discounting. mimeo, 2011.

Michael Woodford. Interest&Prices - Foundations of a Theory of Monetary Policy. Princeton University Press, Princeton, New Jersey, 2003. 28

Michael Woodford. Optimal Monetary Stabilization Policy. In Benjamin M. Friedman and Michael Woodford, editors, Handbook of Monetary Economics, volume 3 of Handbook of Monetary Economics, chapter 14, pages 723–828. Elsevier, January 2010.