The tragedy of the commons and inflation bias in the euro area

Central bank credit has expanded dramatically in some of the euro area member countries since the beginning of the …nancial crisis. This paper makes two contributions to understand this stylized fact. First, we discuss a simple model of monetary policy that includes (i) a credit channel and (ii) a common pool problem in a monetary union. We illustrate that the interaction of the two elements leads to an in‡ation bias that is independent of the standard time-inconsistency bias. Secondly, we present empirical evidence that is consistent with the view that national central banks in the euro area have indeed followed an independent monetary policy. We show that after 2007, central bank credit has been highly correlated with unemployment, but not with in‡ation in the respective countries. JEL: E52, E58, H41;