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Tradeoffs, Delegation and Fiscal-Monetary Coordination in a Developing Economy

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Author Info

  • Ashima Goyal

    (Indira Gandhi Institute of Development Research, Mumbai, India)

Abstract

Strategic interaction between fiscal and monetary authorities and economic agents, can lead to the creation of more populism than is socially optimal. The tradeoffs through which this occurs, important for a populous democracy with a large number of poor, is that between populism and growth. This has not received much analytical attention. We derive this tradeoff from microfoundations (i) and show that a Nash equilibrium will occur with a level of populism higher than the optimal; fiscal and monetary interaction will lead to output below feasible levels, (ii) specify the conditions on which the results depend, (iii) discuss stabilisation possibilities, and (iv) show that optimal delegation to a pro-growth monetary authority and a conservative fiscal authority would lower populism and inflation, while keeping growth at sustainable levels. Last, the model is used to interpret Indian macroeconomic performance.

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Bibliographic Info

Article provided by Department of Economics, Delhi School of Economics in its journal Indian Economic Review.

Volume (Year): 42 (2007)
Issue (Month): 2 (December)
Pages: 141-164

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Handle: RePEc:dse:indecr:v:42:y:2007:i:2:p:141-164

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Related research

Keywords: Tradeoffs; Dynamic Inconsistency; Fiscal-Monetary Co-Ordination; Delegation;

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Cited by:
  1. Ashima Goyal, 2011. "History of monetary policy in India since independence," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2011-018, Indira Gandhi Institute of Development Research, Mumbai, India.
  2. Ashima Goyal, 2010. "Exchange Rate Regimes and Macroeconomic Performance in South Asia," Working Papers id:2545, eSocialSciences.
  3. Goyal, Ashima, 2006. "Macroeconomic policy and the exchange rate: working together?," MPRA Paper 27768, University Library of Munich, Germany.
  4. Ashima Goyal & Shruti Tripathi, 2012. "Stability and policy rules in emerging markets," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2012-004, Indira Gandhi Institute of Development Research, Mumbai, India.

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