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Fiscal Policy and Imperfectly Credible Targets: Should We Appoint Expenditure-Conservative Central Bankers?

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Author Info

  • Marco Lossani

    (Catholic University of Milan)

  • Piergiovanna Natale

    ()
    (Department of Economics, University of Milan-Bicocca)

  • Patrizio Tirelli

    ()
    (Department of Economics, University of Milan-Bicocca and University of Glasgow)

Abstract

We reconsider Svensson’s inflation-targeting proposal in a model where the need to raise seigniorage revenues determines the socially optimal inflation rate and distortionary taxes cause the inflation bias. Interpreting the targets as contracts, we show that the interaction between fiscal and monetary policy complicates the structure of the optimal contract. Moreover, if the commitment technology is imperfect, “highish” targets generate lower inflation than targets which are too low to be credible. Then we turn to an interpretation of inflation targets as monetary policy delegation to a nondistortionary, target-conservative agent. In our model target-conservative bankers are public-expenditure conservative. Expenditure-conservatism may explain why central bank independence is orthogonal to output variability.

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File URL: http://dipeco.economia.unimib.it/repec/pdf/mibwpaper6.pdf
File Function: First version, 1997
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Bibliographic Info

Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 06.

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Length: 24 pages
Date of creation: Jul 1997
Date of revision: Jul 1997
Handle: RePEc:mib:wpaper:06

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  1. Alberto Alesina & Nouriel Roubini, 1990. "Political Cycles in OECD Economies," NBER Working Papers 3478, National Bureau of Economic Research, Inc.
  2. Ben S. Bernanke & Ilian Mihov, 1996. "What Does the Bundesbank Target?," NBER Working Papers 5764, National Bureau of Economic Research, Inc.
  3. Alesina, Alberto & Tabellini, Guido, 1987. "Rules and Discretion with Noncoordinated Monetary and Fiscal Policies," Economic Inquiry, Western Economic Association International, vol. 25(4), pages 619-30, October.
  4. Svensson, L.E.O., 1993. "The Simplest Test of Inflation Target Credibility," Papers 560, Stockholm - International Economic Studies.
  5. Bennett T. McCallum, 1995. "Two Fallacies Concerning Central Bank Independence," NBER Working Papers 5075, National Bureau of Economic Research, Inc.
  6. Christopher J. Waller, 1995. "Performance contracts for central bankers," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 3-14.
  7. Gylfason, Thorvaldur & Herbertsson, Tryggvi Thor, 1996. "Does Inflation Matter for Growth?," CEPR Discussion Papers 1503, C.E.P.R. Discussion Papers.
  8. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
  9. Roubini, Nouriel & Alesina, Alberto, 1992. "Political Cycles in OECD Economies," Scholarly Articles 4553025, Harvard University Department of Economics.
  10. Sweeney, Richard J, 1987. "Some Macro Implications of Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(2), pages 222-34, May.
  11. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May.
  12. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December.
  13. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  14. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  15. Tabellini, Guido, 1986. "Money, debt and deficits in a dynamic game," Journal of Economic Dynamics and Control, Elsevier, vol. 10(4), pages 427-442, December.
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