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Commitment versus discretion in a political economy model of fiscal and monetary policy interaction

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  • Miller, David S.

Abstract

Does price commitment result in lower welfare? I pair an independent monetary authority controlling nominal bonds with a fiscal authority microfounded by the political economy model of Battaglini and Coate (2008). Without price commitment, time inconsistency is alleviated by interaction between the benevolent monetary authority and the politically distorted fiscal authority. With price commitment, nominal bonds will be used for wasteful spending by the politically distorted fiscal authority. Price commitment results in lower welfare because it eliminates monetary control over fiscal decisions.

Suggested Citation

  • Miller, David S., 2016. "Commitment versus discretion in a political economy model of fiscal and monetary policy interaction," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 17-29.
    • Handle: RePEc:eee:moneco:v:84:y:2016:i:c:p:17-29
    DOI: 10.1016/j.jmoneco.2016.09.002
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