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Government Leadership and Central Bank Design

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  • Andrew Hughes Hallett

    ()
    (Department of Economics, Vanderbilt University)

  • Diana N. Weymark

    ()
    (Department of Economics, Vanderbilt University)

Abstract

This article investigates the impact on economic performance of the timing of moves in a policy game between the government and the central bank for a government with both distributional and stabilization objectives. It is shown that both inflation and income inequality are reduced without sacrificing output growth if the government assumes a leadership role compared to a regime in which monetary and fiscal policy is determined simultaneously. Further, it is shown that government leadership benefits both the fiscal and monetary authorities. The implications of these results for a country deciding whether to join a monetary union are also considered.

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File URL: http://www.accessecon.com/pubs/VUECON/vu02-w08R.pdf
File Function: Revised version, 2004
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0208.

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Date of creation: May 2002
Date of revision: Dec 2004
Handle: RePEc:van:wpaper:0208

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

Related research

Keywords: Central bank independence; monetary policy delegation; policy coordination; policy game; policy leadership;

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References

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  1. Gilles Oudiz & Jeffrey Sachs, 1984. "Macroeconomic Policy Coordination among the Industrial Economies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(1), pages 1-76.
  2. Hughes Hallett, Andrew & Weymark, Diana, 2002. "Independence before Conservatism: Transparency, Politics and Central Bank Design," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3336, C.E.P.R. Discussion Papers.
  3. David Currie & Paul Levine, 1985. "Macroeconomic Policy Design In An Interdependent World," NBER Chapters, in: International Economic Policy Coordination, pages 228-273 National Bureau of Economic Research, Inc.
  4. Rich, Georg, 2000. "Monetary Policy without Central Bank Money: A Swiss Perspective," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 3(3), pages 439-69, November.
  5. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(1), pages 101-121.
  6. Fischer, Stanley, 1995. "Central-Bank Independence Revisited," American Economic Review, American Economic Association, American Economic Association, vol. 85(2), pages 201-06, May.
  7. Robert J. Barro, 1980. "Output Effects of Government Purchases," NBER Working Papers 0432, National Bureau of Economic Research, Inc.
  8. Avinash Dixit & Luisa Lambertini, 2003. "Interactions of Commitment and Discretion in Monetary and Fiscal Policies," Boston College Working Papers in Economics, Boston College Department of Economics 575, Boston College Department of Economics.
  9. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, Elsevier, vol. 4(2), pages 103-124, April.
  10. Hughes Hallett, Andrew & Weymark, Diana, 2002. "The Cost of Heterogeneity in a Monetary Union," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3223, C.E.P.R. Discussion Papers.
  11. Dave Turner & Elena Seghezza, 1999. "Testing for a Common OECD Phillips Curve," OECD Economics Department Working Papers 219, OECD Publishing.
  12. A.J. Hallet, 1998. "When Do Target Zones Work? An Examination of Exchange Rate Targeting as a Device for Coordinating Economic Policies," Open Economies Review, Springer, Springer, vol. 9(2), pages 115-138, April.
  13. Andrew Hughes Hallett & Diana N. Weymark, 2002. "Policy Games and the Optimal Design of Central Banks," Vanderbilt University Department of Economics Working Papers, Vanderbilt University Department of Economics 0220, Vanderbilt University Department of Economics.
  14. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, American Economic Association, vol. 63(3), pages 326-34, June.
  15. Nolan, Charles, 2002. "Monetary Stabilisation Policy in a Monetary Union: Some Simple Analytics," Scottish Journal of Political Economy, Scottish Economic Society, Scottish Economic Society, vol. 49(2), pages 196-215, May.
  16. Andrew Hallett & Nicola Viegi, 2002. "Inflation Targeting as a Coordination Device," Open Economies Review, Springer, Springer, vol. 13(4), pages 341-362, October.
  17. Dixit, Avinash & Lambertini, Luisa, 2001. "Monetary-fiscal policy interactions and commitment versus discretion in a monetary union," European Economic Review, Elsevier, Elsevier, vol. 45(4-6), pages 977-987, May.
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Citations

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Cited by:
  1. Andrew Hughes Hallett, 2004. "Post-Thatcher Fiscal Strategies in the U.K.: An Interpretation," CESifo Working Paper Series 1372, CESifo Group Munich.
  2. Weymark, Diana N., 2007. "Inflation, government transfers, and optimal central bank independence," European Economic Review, Elsevier, Elsevier, vol. 51(2), pages 297-315, February.
  3. Ullrich, Katrin, 2003. "Unabhängigkeit und Verantwortlichkeit der Europäischen Zentralbank," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 03-65, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Hughes Hallett, Andrew, 2005. "In Praise of Fiscal Restraint and Debt Rules. What the Euro Zone Might Do Now," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5043, C.E.P.R. Discussion Papers.

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