IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Policy Biases when the Monetary and Fiscal Authorities have Different Objectives

  • Herman Bennett C.
  • Norman Loayza O.

The question that this paper examines is what policy bias there may be when monetary and fiscal authorities have different preferences regarding the importance of closing the output and inflation gaps created by adverse economic shocks. For this purpose, the paper follows a game-theoretic approach to model the interaction between monetary and fiscal authorities, each having different preferences and controlling their respective policy instrument. Modeled as a Nash or Stackelberg equilibrium, the absence of policy coordination implies that an increase in the preference divergence between both authorities leads to, ceteris paribus, larger public deficits (the fiscal authority’s policy instrument) and higher interest rates (the central bank’s instrument). The empirical section of the paper provides evidence in favor of this conclusion in a pooled sample of 19 industrial countries with annual information for the period 1970-94. The policy implication of the paper is that, without prejudice to the gains from central bank independence, institutional arrangements that allow for monetary-fiscal coordination may alleviate the biases that move the economy to sub-optimally higher fiscal deficits and real interest rates.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.bcentral.cl/estudios/revista-economia/2000/ago2000/rec_v3n2_pp53_72.pdf
Download Restriction: no

Article provided by Central Bank of Chile in its journal Economía Chilena.

Volume (Year): 3 (2000)
Issue (Month): 2 (August)
Pages: 53-72

as
in new window

Handle: RePEc:chb:bcchec:v:3:y:2000:i:2:p:53-72
Contact details of provider: Postal: Casilla No967, Santiago
Phone: (562) 670 2000
Fax: (562) 698 4847
Web page: http://www.bcentral.cl/

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-98, September.
  2. Walsh, Carl E., 1993. "Central bank strategies, credibility, and independence : A review essay," Journal of Monetary Economics, Elsevier, vol. 32(2), pages 287-302, November.
  3. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, June.
  4. Loewy, Michael B, 1988. "Reaganomics and Reputation Revisited," Economic Inquiry, Western Economic Association International, vol. 26(2), pages 253-63, April.
  5. William D. Nordhaus, 1994. "Policy games: Coordination and Independece in Monetary and Fiscal Policies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 139-216.
  6. Woodford, Michael, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(0), pages 1-35, Supplemen.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:chb:bcchec:v:3:y:2000:i:2:p:53-72. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Claudio Sepulveda)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.