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Can Conservatism Be Counterproductive? Delegation and Fiscal Policy in a Monetary Union

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  • Pina, Alvaro Manuel

Abstract

This paper studies central bank independence in a model of a monetary union where fiscal policies remain the responsibility of national governments and generate externalities. Governments may either coordinate fiscal policy or not, and three forms of delegation are considered: Rogoff-type 'weight independence,' inflation targets and linear inflation contracts. The key results are as follows. Under fiscal coordination, 'conservatism' holds and targets (or contracts) out-perform 'weight independence.' Without fiscal coordination, 'anticonservatism' may be optimal when fiscal spillovers are negative, as it reduces governments' activism; and 'weight twenty' is restored, since it can alleviate distortions in shock stabilization. Copyright 1999 by Blackwell Publishers Ltd and The Victoria University of Manchester

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  • Pina, Alvaro Manuel, 1999. "Can Conservatism Be Counterproductive? Delegation and Fiscal Policy in a Monetary Union," Manchester School, University of Manchester, vol. 67(0), pages 88-115, Supplemen.
  • Handle: RePEc:bla:manchs:v:67:y:1999:i:0:p:88-115
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    Cited by:

    1. Roel M. W. J. Beetsma & Xavier Debrun & Franc Klaassen, 2001. "Is Fiscal Policy Coordination in EMU Desirable?," IMF Working Papers 01/178, International Monetary Fund.
    2. Francesca Castellani & Xavier Debrun, 2001. "Central Bank Independence and the Design of Fiscal Institutions," IMF Working Papers 01/205, International Monetary Fund.

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