Fiscal Policy and Imperfectly Credible Targets: Should We Appoint Expenditure-Conservative Central Bankers?
AbstractWe 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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Bibliographic InfoPaper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 06.
Length: 24 pages
Date of creation: Jul 1997
Date of revision: Jul 1997
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