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Marching to Different Drummers: Coordination and Independence in Monetary and Fiscal Policies

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Abstract

Most countries have recently experienced high fiscal deficits and real interest rates that depressed national saving and slowed economic growth. This study analyzes the reasons that underlie the skewed fiscal-monetary mix. The first section develops a game-theoretic model of fiscal and monetary coordination and shows that the macroeconomic outcomes depend upon the degree of coordination or independence. The second section applies this approach to the Clinton package by using three macroeconomic models to estimate the likely macroeconomic impacts of different degrees of coordination. The paper concludes that an uncoordinated policy may lead to substantial loss of output that will not be offset by higher potential output growth for many years. This implies that the potential gains from coordination are extremely high.

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File URL: http://cowles.econ.yale.edu/P/cd/d10b/d1067.pdf
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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1067.

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Length: 52 pages
Date of creation: Jan 1994
Date of revision:
Handle: RePEc:cwl:cwldpp:1067

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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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  1. Robert S. Pindyck, 1976. "The Cost of Conflicting Objectives in Policy Formulation," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 2, pages 239-248 National Bureau of Economic Research, Inc.
  2. Stephen K. McNees, 1986. "Modeling the Fed: a forward- looking monetary policy reaction function," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 3-8.
  3. Fair, Ray C, 1993. "Testing Macroeconomic Models," American Economic Review, American Economic Association, vol. 83(2), pages 287-93, May.
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