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Fiscal Policy and Inflation Targets: Does Credibility Matters?

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  • Lossani, Marco
  • Natale, Piergiovanna
  • Tirelli, Patrizio

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. Alternatively, interpreting inflation targets as policy delegation to a non-distortionary target-conservative agent, we show that target-conservative bankers are public-expenditures conservative. Unfortunately, only idiosyncratic views about the benefits from public expenditures can be invoked to justify expenditures-conservatism, implying that target-conservative agents are also weight-conservative.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 18693.

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Date of creation: 2000
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Handle: RePEc:pra:mprapa:18693

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Keywords: Central bank independence; Inflation targets;

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References

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  1. 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.
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  3. Willem H. Buiter, 1999. "Alice in Euroland," LSE Research Online Documents on Economics 20226, London School of Economics and Political Science, LSE Library.
  4. Svensson, L.E.O., 1993. "The Simplest Test of Inflation Target Credibility," Papers 560, Stockholm - International Economic Studies.
  5. van der Ploeg, Frederick, 1995. "Political Economy of Monetary and Budgetary Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 427-39, May.
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  22. Marco Lossani & Piergiovanna Natale & Patrizio Tirelli, 1997. "Do we really need to tame a conservative ECB? When the policy mix matters," Working Papers 18, University of Milano-Bicocca, Department of Economics, revised Nov 1998.
  23. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
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Cited by:
  1. Flamini Alessandro, 2012. "Interest Rate Forecasts in Inflation Targeting Open-Economies," Economia politica, Società editrice il Mulino, issue 3, pages 381-408.

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