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Fiscal policy, institutional quality and central bank transparency

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  • Meixing Dai
  • Moïse Sidiropoulos
  • Eleftherios Spyromitros

Abstract

This paper examines monetary and fiscal interactions in a framework where the government worries about political costs of low institutional quality and central bank opacity acts as a disciplinary device leading the government to reduce distortionary taxes and public expenditures. Greater opacity could thus lower the reactions of inflation expectations and inflation but increase those of the output gap to supply shocks and the target of public expenditures, and would be beneficial in terms of less macroeconomic volatility. Under the least favourable assumptions on the effect of corruption, i.e. ‘sanding-the-wheels’ effect or weak ‘greasing-the-wheels’ effect, we have shown that there is a fiscal disciplining effect of central bank opacity in a game framework where the government is a Stackelberg leader. Imperfect transparency could increase corruption only if the ‘greasing-the-wheels’ effect is relatively large. These results could be reinforced by the presence of grand corruption.

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Paper provided by Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg in its series Working Papers of BETA with number 2014-04.

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Date of creation: 2014
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Handle: RePEc:ulp:sbbeta:2014-04

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Keywords: Central bank opacity; fiscal disciplining effect; distortions; institutional quality; corruption.;

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

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