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Do we really need to tame a conservative ECB? When the policy mix matters

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Author Info

  • Marco Lossani

    (Catholic University of Milan-Bicocca)

  • Piergiovanna Natale

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

  • Patrizio Tirelli

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

Abstract

This paper contributes to the goal-versus-instrument independence debate for the ECB exploring how these alternative monetary arrangements perform when the fiscal authority pursues a strategy of debt reduction in the long term but retains fiscal flexibility in response to supply shocks. If fiscal policy is sufficiently flexible, appointing a goal independent (i.e. conservative) central banker dominates inflation targeting. In fact, as the fiscal authority and the central bank act independently in setting their countercyclical policies, an activist central banker causes excess volatility of inflation. This result provides theoretical content to the claim that a strong and goal-independent ECB needs a political match able to engineer countercyclical fiscal policies.

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File URL: http://dipeco.economia.unimib.it/repec/pdf/mibwpaper18.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 18.

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Length: 19 pages
Date of creation: Oct 1997
Date of revision: Nov 1998
Handle: RePEc:mib:wpaper:18

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  1. Beetsma, Roel M. W. J. & Bovenberg, A. Lans, 1997. "Central bank independence and public debt policy," Journal of Economic Dynamics and Control, Elsevier, vol. 21(4-5), pages 873-894, May.
  2. Torsten Persson & Guido Tabellini, 1996. "Monetary Cohabitation in Europe," NBER Working Papers 5532, National Bureau of Economic Research, Inc.
  3. Patrizio Tirelli, 1997. "Dynamic Seigniorage Models Revisited. Should Fiscal Flexibility and Conservative Central Bankers Go Together?," Working Papers 19, University of Milano-Bicocca, Department of Economics, revised Feb 1999.
  4. Persson, Torsten & Tabellini, Guido, 1997. "Political Economics and Macroeconomic Policy," CEPR Discussion Papers 1759, C.E.P.R. Discussion Papers.
  5. Cukierman, Alex & Meltzer, Allan H, 1989. "A Political Theory of Government Debt and Deficits in a Neo-Ricardian Framework," American Economic Review, American Economic Association, vol. 79(4), pages 713-32, September.
  6. Haan, J. de & Amtenbrink, F. & Eijffinger, S.C.W., 1998. "Accountability of Central Banks: Aspects and Quantification," Discussion Paper 1998-54, Tilburg University, Center for Economic Research.
  7. Robert J. Barro, 2012. "Inflation and Economic Growth," CEMA Working Papers 568, China Economics and Management Academy, Central University of Finance and Economics.
  8. 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.
  9. De Grauwe, Paul, 1996. "Inflation Targeting to Achieve Inflation Convergence in the Transition Towards EMU," CEPR Discussion Papers 1457, C.E.P.R. Discussion Papers.
  10. Daveri, Francesco & Tabellini, Guido, 1997. "Unemployment, Growth and Taxation in Industrial Countries," CEPR Discussion Papers 1681, C.E.P.R. Discussion Papers.
  11. Jensen, Henrik, 1994. "Loss of monetary discretion in a simple dynamic policy game," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 763-779.
  12. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  13. Tabellini, Guido & Alesina, Alberto, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Scholarly Articles 3612769, Harvard University Department of Economics.
  14. Sorensen, B-E & Yosha, O, 1996. "International Risk Sharing and European Monetary Unification," Papers 40-96, Tel Aviv.
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Cited by:
  1. Lossani Marco & Natale Piergiovanna & Tirelli Patrizio, 2001. "Fiscal Policy and Inflation Targets: Does Credibility Matter?," Economia politica, Società editrice il Mulino, issue 3, pages 371-392.

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