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Monetary and fiscal policy interactions with central bank transparency and public investment

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  • Meixing Dai
  • Moïse Sidiropoulos

Abstract

In this paper, we study how the interactions between central bank transparency and fiscal policy affect macroeconomic performance and volatility, in a framework where productivity-enhancing public investment could improve future growth potential. We analyze the effects of central bank’s opacity (lack of transparency) according to the marginal effect of public investment by considering the Stackelberg equilibrium where the government is the first mover and the central bank the follower. We show that the optimal choice of tax rate and public investment, when the public investment is highly productivity-enhancing, eliminates the effects of distortionary taxation and fully counterbalance both the direct and the fiscal-disciplining effects of opacity, on the level and variability of inflation and output gap. In the case where the public investment is not sufficiently productivity-enhancing, opacity could still have some disciplining effects as in the benchmark model, which ignores the effects of public investment.

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Paper provided by Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg in its series Working Papers of BETA with number 2010-21.

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Date of creation: 2010
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Handle: RePEc:ulp:sbbeta:2010-21

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Keywords: Distortionary taxes; output distortions; productivity-enhancing public investment; central bank transparency (opacity); fiscal disciplining effect.;

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Citations

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Cited by:
  1. Dai, Meixing, 2010. "External constraint and financial crises with balance sheet effects," MPRA Paper 21625, University Library of Munich, Germany.
  2. Meixing Dai & Moïse Sidiropoulos, 2010. "Monetary and fiscal policy interactions with central bank transparency and public investment," Working Papers of BETA 2010-21, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  3. Meixing Dai & Moïse Sidiropoulos, 2011. "Fiscal disciplining effect of central bank opacity: Stackelberg versus Nash equilibrium," Working Papers of BETA 2011-17, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

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