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Monetary and fiscal policy interactions with central bank transparency and public investment

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  • Dai, Meixing
  • Sidiropoulos, Moïse

Abstract

In this paper, we study how the interactions between central bank transparency and fiscal policy affect macroeconomic performance and volatility, in a framework where productivity-enhancing public investment could improve future growth potential. We analyze the effects of the central bank's opacity (lack of transparency) according to the marginal effect of public investment by considering the Stackelberg equilibrium, where the government is the first mover and the central bank the follower. We show that the optimal choice of tax rate and public investment, when the public investment is highly productivity enhancing, eliminates the effects of distortionary taxation and fully counterbalance both the direct and the fiscal-disciplining effects of opacity, on the level and variability of inflation and the output gap. In the case where the public investment is not sufficiently productivity enhancing, opacity could still have some disciplining effects as in the benchmark model, which ignores the effects of public investment.

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Bibliographic Info

Article provided by Elsevier in its journal Research in Economics.

Volume (Year): 65 (2011)
Issue (Month): 3 (September)
Pages: 195-208

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Handle: RePEc:eee:reecon:v:65:y:2011:i:3:p:195-208

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Web page: http://www.elsevier.com/locate/inca/622941

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Keywords: Distortionary taxes Output distortions Productivity-enhancing public investment Central bank transparency (opacity) Fiscal-disciplining effect;

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Cited by:
  1. Dai, Meixing & Sidiropoulos, Moïse, 2011. "Monetary and fiscal policy interactions with central bank transparency and public investment," Research in Economics, Elsevier, vol. 65(3), pages 195-208, September.
  2. Dai, Meixing, 2010. "External constraint and financial crises with balance sheet effects," MPRA Paper 21625, University Library of Munich, Germany.
  3. Meixing Dai & Moïse Sidiropoulos, 2011. "Fiscal disciplining effect of central bank opacity: Stackelberg versus Nash equilibrium," Working Papers of BETA 2011-17, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

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