Revisiting Public Debt and Inflation: Fiscal Implications of an Independent Central Banker

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Revisiting Public Debt and Inflation: Fiscal Implications of an Independent Central Banker

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

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Patrizio Tirelli

Abstract

The mainstream literature on monetary policy games under output persistence posits that: a) monetary regimes do not affect real variables in the steady state; b) optimal institutional design should entirely remove the inflation bias. We show that neither result necessarily holds if output persistence originates from debt dynamics and distortionary taxation. First, monetary delegation induces a strategic use of debt policy affecting steady-state distortions. Second, the reduction of such distortions may require monetary institutions that tolerate an inflation rate above the socially optimal level.

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Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 31.

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Length: 33 pages
Date of creation: Nov 2000
Date of revision: Nov 2000
Handle: RePEc:mib:wpaper:31

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Other versions:
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Other versions:
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Other versions:
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Other versions:
- Beetsma, R.M.W.J. & Bovenberg, A.L., 1995. "Monetary Union without Fiscal Coordination May Discipline Policymakers," DELTA Working Papers 95-22, DELTA (Ecole normale supérieure).
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Other versions:
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