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Inflation Conservatism and Monetary-Fiscal Policy Interactions

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  • Andrew P. Blake

    (Bank of England)

  • Tatiana Kirsanova

    (University of Exeter)

Abstract

This paper investigates the stabilization bias that arises in a model of monetary and fiscal policy stabilization of the economy, when monetary authority puts higher weight on inflation stabilization than society. We demonstrate that inflation conservatism unambiguously leads to social welfare losses if the fiscal authority acts strategically under discretion. Although the precise form of monetary-fiscal interactions depends on the leadership structure, the choice of fiscal instrument, and the level of steady-state debt, the assessment of gains is robust to these assumptions. We develop an algorithm that computes leadership equilibria in a general framework of LQ RE models with strategic agents.

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 7 (2011)
Issue (Month): 2 (June)
Pages: 41-83

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Handle: RePEc:ijc:ijcjou:y:2011:q:2:a:2

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  1. Ploeg, F. van der & Zeeuw, A.J. de, 1991. "Difference games and policy evaluation: A conceptual framework," Open Access publications from Tilburg University urn:nbn:nl:ui:12-377519, Tilburg University.
  2. Hughes Hallett, Andrew & Libich, Jan & StehlĂ­k, Petr, 2009. "Rogoff revisited: The conservative central banker proposition under active fiscal policies," Economics Letters, Elsevier, vol. 104(3), pages 140-143, September.
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Cited by:
  1. Muhammad Ali Nasir & Alaa M. Soliman, 2014. "Aspects of Macroeconomic Policy Combinations and Their Effects on Financial Markets," Economic Issues Journal Articles, Economic Issues, vol. 19(1), pages 95-118, March.
  2. Garreth Rule, 2011. "Issuing central bank securities," Handbooks, Centre for Central Banking Studies, Bank of England, edition 1, number 30.
  3. Garreth Rule, 2012. "Collateral management in central bank policy operations," Handbooks, Centre for Central Banking Studies, Bank of England, edition 1, number 31.
  4. Bai, Yuting & Kirsanova, Tatiana, 2013. "Infrequent Fiscal Stabilization," SIRE Discussion Papers 2013-17, Scottish Institute for Research in Economics (SIRE).
  5. Fragetta, Matteo & Kirsanova, Tatiana, 2010. "Strategic monetary and fiscal policy interactions: An empirical investigation," European Economic Review, Elsevier, vol. 54(7), pages 855-879, October.

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