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

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

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Cuciniello Vincenzo

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Vincenzo Cuciniello

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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This paper has been announced in the following NEP Reports:

NEP-ALL-2008-02-09 (All new papers)
NEP-CBA-2008-02-09 (Central Banking)
NEP-DGE-2008-02-09 (Dynamic General Equilibrium)
NEP-MAC-2008-02-09 (Macroeconomics)
NEP-MON-2008-02-09 (Monetary Economics)

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Francesco Lippi, 2003. "Strategic Monetary Policy with Non-Atomistic Wage Setters," Review of Economic Studies, Blackwell Publishing, vol. 70(4), pages 909-919, October. [Downloadable!] (restricted)
Other versions:
- Francesco Lippi, 2000. "Strategic Monetary Policy with Non-Atomistic Wage-Setters," Temi di discussione (Economic working papers) 374, Bank of Italy, Economic Research Department. [Downloadable!]
- Francesco Lippi, 2000. "Strategic Monetary Policy with Non Atomistic Wage Setters," Econometric Society World Congress 2000 Contributed Papers 1354, Econometric Society. [Downloadable!]
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Olivier Blanchard & Francesco Giavazzi, 2003. "Macroeconomic Effects Of Regulation And Deregulation In Goods And Labor Markets," The Quarterly Journal of Economics, MIT Press, vol. 118(3), pages 879-907, August. [Downloadable!] (restricted)
Other versions:
- 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. [Downloadable!] (restricted)
- Olivier Blanchard & Francesco Giavazzi, . "Macroeconomic effects of regulation and deregulation in goods and labor markets," Working Papers 187, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
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Robert J. Barro & David B. Gordon, 1983. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- 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. [Downloadable!] (restricted)
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. [Downloadable!] (restricted)
Other versions:
- Lawrence H. Summers & Jonathan Gruber & Rodrigo Vergara, 1992. "Taxation and the Structure of Labor Markets: The Case of Corporatism," NBER Working Papers 4063, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, Oxford University Press, vol. 6(3), pages 353-98, September.
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Other versions:
- Lars E.O. Svensson, 1998. "Inflation Targeting as a Monetary Policy Rule," NBER Working Papers 6790, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
- Svensson, Lars E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Seminar Papers 646, Stockholm University, Institute for International Economic Studies. [Downloadable!]
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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. [Downloadable!] (restricted)
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.

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