In many countries two decision-making institutions, the government and the central bank, manage fiscal and monetary policy separately. Such decentralization can lead to a change in the optimal inflation-output trade-off. In fact lack of cooperation can result in a change in the position of the trade-off curve, or a reversal in the slope of this trade-off, or even the total absence of any exploitable trade-off. In this paper the techniques of differential game theory are used to calculate the efficient inflation-output trade-off within a continuous-time econometric model of the Italian economy, in order to examine the differences in the 'policy possibility frontiers' which arise as the result of cooperative and of noncooperative decision-making. The results show that the outcomes obtained in the case of noncooperation are inferior to those under cooperation, and also impose a policy conflict which would not otherwise be present. Moreover the range of policy choices open to the policy-makers is reduced under noncooperation. The results indicate that efficiency gains are not the only reason for coordinating fiscal and monetary policies.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
251.