Advanced Search
MyIDEAS: Login to save this article or follow this journal

Policy Biases when the Monetary and Fiscal Authorities have Different Objectives

Contents:

Author Info

  • Herman Bennett C.
  • Norman Loayza O.

Abstract

The question that this paper examines is what policy bias there may be when monetary and fiscal authorities have different preferences regarding the importance of closing the output and inflation gaps created by adverse economic shocks. For this purpose, the paper follows a game-theoretic approach to model the interaction between monetary and fiscal authorities, each having different preferences and controlling their respective policy instrument. Modeled as a Nash or Stackelberg equilibrium, the absence of policy coordination implies that an increase in the preference divergence between both authorities leads to, ceteris paribus, larger public deficits (the fiscal authority’s policy instrument) and higher interest rates (the central bank’s instrument). The empirical section of the paper provides evidence in favor of this conclusion in a pooled sample of 19 industrial countries with annual information for the period 1970-94. The policy implication of the paper is that, without prejudice to the gains from central bank independence, institutional arrangements that allow for monetary-fiscal coordination may alleviate the biases that move the economy to sub-optimally higher fiscal deficits and real interest rates.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.bcentral.cl/estudios/revista-economia/2000/ago2000/rec_v3n2_pp53_72.pdf
Download Restriction: no

Bibliographic Info

Article provided by Central Bank of Chile in its journal Economía Chilena.

Volume (Year): 3 (2000)
Issue (Month): 2 (August)
Pages: 53-72

as in new window
Handle: RePEc:chb:bcchec:v:3:y:2000:i:2:p:53-72

Contact details of provider:
Postal: Casilla No967, Santiago
Phone: (562) 670 2000
Fax: (562) 698 4847
Web page: http://www.bcentral.cl/
More information through EDIRC

Related research

Keywords:

Other versions of this item:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Michael Woodford, 1999. "Optimal Monetary Policy Inertia," NBER Working Papers 7261, National Bureau of Economic Research, Inc.
  2. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, World Bank Group, vol. 6(3), pages 353-98, September.
  3. Cukierman Alex, 1992. "Central Bank Strategy, Credibility, And Independance: Theory And Evidence," Journal des Economistes et des Etudes Humaines, De Gruyter, De Gruyter, vol. 3(4), pages 10, December.
  4. Walsh, Carl E., 1993. "Central bank strategies, credibility, and independence : A review essay," Journal of Monetary Economics, Elsevier, Elsevier, vol. 32(2), pages 287-302, November.
  5. Loewy, Michael B, 1988. "Reaganomics and Reputation Revisited," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 26(2), pages 253-63, April.
  6. William D. Nordhaus, 1994. "Policy games: Coordination and Independece in Monetary and Fiscal Policies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 139-216.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Kamal, Mona, 2010. "التحقق من أثر التنسيق بين السياستين المالية والنقدية على الأهداف الاقتصادية باستخدام نموذج قياسي
    [The Assessment o
    ," MPRA Paper 26670, University Library of Munich, Germany.
  2. Luis Felipe Céspedes & Rodrigo Valdés, 2006. "Autonomía de Bancos Centrales: La Experiencia Chilena," Working Papers Central Bank of Chile, Central Bank of Chile 358, Central Bank of Chile.
  3. Luis Felipe Céspedes C. & Rodrigo Valdés P., 2006. "Central Bank Autonomy: The Chilean Experience," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, Central Bank of Chile, vol. 9(1), pages 25-47, April.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:chb:bcchec:v:3:y:2000:i:2:p:53-72. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Claudio Sepulveda).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.