The impact of fiscal-monetary policy interactions on government size and macroeconomic performance
AbstractThis paper analyzes the relationship between inflation, output and government size by reexamining the time inconsistency of optimal monetary and fiscal policies in a general equilibrium model with staggered timing structure for the acquisition of nominal money à la Neiss (Neiss, Katharine S. (1999), Discretionary Inflation in a General Equilibrium Model, Journal of Money, Credit and Banking, 31(3), pp. 357-374.), and public expenditure financed by means of a distortive tax. It is shown that, with predetermined wages, the equilibrium rate of inflation is above the Friedman rule and the equilibrium tax rate is below the efficient level. In particular, the discretionary rate of inflation is nonmonotonically related to the natural output, positively related to government size, and negatively related to the degree of central bank conservatism. Finally, a regime with commitment leads to welfare improvements over a regime with discretion.
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Bibliographic InfoArticle provided by Elsevier in its journal Economic Modelling.
Volume (Year): 26 (2009)
Issue (Month): 5 (September)
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/30411
Inflation bias Government size Rules and discretion E31 H21;
Find related papers by JEL classification:
- Inf - Health, Education, and Welfare - - - - -
- bia - - - - - -
- Gov - Financial Economics - - - - -
- siz - - - - - -
- Rul - Urban, Rural, Regional, Real Estate, and Transportation Economics - - - - -
- and - - - - - -
- dis - - - - - -
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
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