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Abstract

We consider monetary-fiscal interactions when the monetary authority is more conservative than the fiscal. With both policies discretionary, (1) Nash equilibrium yields lower output and higher price than the ideal points of both authorities, (2) of the two leadership possibilities, fiscal leadership is generally better. With fiscal discretion, monetary commitment yields the same outcome as discretionary monetary leadership for all realizations of shocks. But fiscal commitment is not similarly negated by monetary discretion. Second-best outcomes require either joint commitment, or identical targets for the two authorities - output socially optimal and price level appropriately conservative - or complete separation of tasks.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/000282803322655428
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 93 (2003)
Issue (Month): 5 (December)
Pages: 1522-1542

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Handle: RePEc:aea:aecrev:v:93:y:2003:i:5:p:1522-1542

Note: DOI: 10.1257/000282803322655428
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Find related papers by JEL classification:

• E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
• E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

References

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1. Dixit, Avinash & Lambertini, Luisa, 2001. "Monetary-fiscal policy interactions and commitment versus discretion in a monetary union," European Economic Review, Elsevier, vol. 45(4-6), pages 977-987, May.
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   • Beetsma, R.M.W.J. & Bovenberg, A.L., 1995. "Monetary union without fiscal coordination may discipline policymakers," Discussion Paper 1995-59, Tilburg University, Center for Economic Research.
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10. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
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