Dynamic Seigniorage Models Revisited. Should Fiscal Flexibility and Conservative Central Bankers Go Together?
AbstractThis paper presents a dynamic seigniorage model where excessive debt levels persist in steady state, causing a permanent inflation bias. Discretionary monetary responses to shocks are too interventionist because they do not take into account the role of debt policy, which spreads part of the adjustment onto future periods. Institutional design should contemplate the appointment of weight-conservative central bankers. The central bank preferences should be more conservative the more the government is willing to delay the adjustment of expenditures following a supply shock. The combination of fiscal intervention and a zero inflation rule describes how members of a monetary union might react to asymmetric shocks. The costs of this regime are negligible if the discount factor is small and seigniorage losses are limited.
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Bibliographic InfoPaper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 19.
Length: 23 pages
Date of creation: Jul 1997
Date of revision: Feb 1999
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