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The effects of macroeconomic institutions on economic performance in a general equilibrium model

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  • Cuciniello Vincenzo

Abstract

This paper analyzes the relation between inflation, output and government size by reexamining the time inconsistency of optimal monetary and fiscal policies in a general equilibrium model with staggered timing structure for the acquisition of nominal money a la Neiss (1999), and public expenditure financed by means of a distortive tax. It focuses on how macroeconomic institutions may affect output, inflation and taxation when monetary and fiscal policies strategically interact in presence of monopolistic distortions in labor markets. It is shown that, with pre determined wage setting, fiscal and monetary policy are subject to a time inconsistency problem, and the equilibrium rate of inflation is above the Friedman rule while the equilibrium tax rate is below the efficient level. In particular, the discretionary rate of inflation is nonmonotonically related to the natural output, positively related to government size, and negatively related to conservatism. Finally, a regime with commitment is always welfare improving over a regime with discretion.

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Paper provided by Department of Communication, University of Teramo in its series wp.comunite with number 0036.

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Date of creation: Feb 2008
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Handle: RePEc:ter:wpaper:0036

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  1. Svensson, Lars E O, 1998. "Inflation Targeting as a Monetary Policy Rule," CEPR Discussion Papers 1998, C.E.P.R. Discussion Papers.
  2. Olivier Blanchard & Francesco Giavazzi, 2001. "Macroeconomic Effects of Regulation and Deregulation in Goods and Labor Markets," NBER Working Papers 8120, National Bureau of Economic Research, Inc.
  3. Neiss, Katharine S, 1999. "Discretionary Inflation in a General Equilibrium Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 357-74, August.
  4. Francesco Lippi, 2003. "Strategic Monetary Policy with Non-Atomistic Wage Setters," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 909-919.
  5. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  6. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-98, September.
  7. 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.
  8. Summers, Lawrence H & Gruber, Jonathan & Vergara, Rodrigo, 1993. "Taxation and the Structure of Labor Markets: The Case of Corporatism," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 385-411, May.
  9. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  10. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
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