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The value of monetary policy commitment under imperfect fiscal credibility

  • Demirel, Ufuk Devrim

A central finding of the previous monetary policy research is that commitment to a policy rule results in substantial welfare gains. In this paper, I reevaluate the value of monetary policy commitment in an environment where monetary and fiscal policies are conducted by separate branches of the government. I find that welfare gains from monetary policy commitment can be small if the fiscal authority can exercise a certain degree of commitment on his own. I also find that a moderate improvement in fiscal credibility can substantially reduce the welfare gains from full commitment in monetary policy under monetary leadership. Under fiscal leadership, the degree of fiscal credibility does not affect the welfare gains from monetary commitment.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 36 (2012)
Issue (Month): 6 ()
Pages: 813-829

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Handle: RePEc:eee:dyncon:v:36:y:2012:i:6:p:813-829
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