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Political Economy of Monetary and Budgetary Policy

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  • van der Ploeg, Frederick

Abstract

Even though all debt and wage contracts are indexed, there is an incentive to levy a surprise inflation tax as this erodes the real value of debt service, permits a cut in the tax rate, and boosts private consumption. With rules it is optimal to smooth tax and seigniorage revenues. However, with discretion (associated with the Markov-perfect equilibrium) the government finances an increase in spending through additional interest income paid on assets that are generated through a temporary bout of inflation and taxation. The electorate prefers to appoint a central banker more concerned with inflation than the median voter. Copyright 1995 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 36 (1995)
Issue (Month): 2 (May)
Pages: 427-39

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Handle: RePEc:ier:iecrev:v:36:y:1995:i:2:p:427-39

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Cited by:
  1. Lossani Marco & Natale Piergiovanna & Tirelli Patrizio, 2001. "Fiscal Policy and Inflation Targets: Does Credibility Matter?," Economia politica, Società editrice il Mulino, issue 3, pages 371-392.
  2. Samir Jahjah, 2001. "Financial Stability and Fiscal Crises in a Monetary Union," IMF Working Papers 01/201, International Monetary Fund.
  3. M. Lossani & P. Natale, & P. Tirelli, 1997. "Fiscal Policy and Imperfectly Credible Inflation Targets: Should We Appoint Expenditure-Conservative Central Bankers?," Working Papers 9707, Business School - Economics, University of Glasgow.
  4. Roel M.W.J. Beetsma & Henrik Jensen, . "Structural Convergence under Reversible and Irreversible Monetary Unification," EPRU Working Paper Series 99-06, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  5. van der Ploeg, Frederick, 1995. "Solvency of counter-cyclical policy rules," Journal of Public Economics, Elsevier, vol. 57(1), pages 45-65, May.
  6. Beetsma, Roel M.W.J. & Lans Bovenberg, A., 2006. "Political shocks and public debt: The case for a conservative central bank revisited," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 1857-1883, November.
  7. Uhlig, H.F.H.V.S. & Beetsma, R.M.W.J., 1997. "An Analysis of the Stability Pact," Discussion Paper 1997-59, Tilburg University, Center for Economic Research.
  8. Patrizio Tirelli, 1997. "Dynamic Seigniorage Models Revisited. Should Fiscal Flexibility and Conservative Central Bankers Go Together?," Working Papers 19, University of Milano-Bicocca, Department of Economics, revised Feb 1999.

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