The time inconsistency of optimal monetary policy is due to the effects of tax distortions. Thus, the issue of how to im prove upon the time-consistent suboptimal monetary policy is related to that of the coordination of monetary and fiscal policy. The author s present a model with three players (the central bank, the fiscal au thority, and wage setters) in which distortionary taxes are explicitl y modeled. They show that binding commitments to monetary rules are n ot necessarily welfare improving if monetary and fiscal policy are no t coordinated. They also examine the effects of different degrees of independence of the central bank. Copyright 1987 by Oxford University Press.
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Article provided by Oxford University Press in its journal Economic Inquiry.
Volume (Year): 25 (1987) Issue (Month): 4 (October) Pages: 619-30 Download reference. The following formats are available: HTML
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Handle: RePEc:oup:ecinqu:v:25:y:1987:i:4:p:619-30
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