Inflation Conservatism and Monetary-Fiscal Policy Interactions
This paper investigates the stabilization bias that arises in a model of monetary and fiscal policy stabilization of the economy, when monetary authority puts higher weight on inflation stabilization than society. We demonstrate that inflation conservatism unambiguously leads to social welfare losses if the fiscal authority acts strategically under discretion. Although the precise form of monetary-fiscal interactions depends on the leadership structure, the choice of fiscal instrument, and the level of steady-state debt, the assessment of gains is robust to these assumptions. We develop an algorithm that computes leadership equilibria in a general framework of LQ RE models with strategic agents.
References listed on IDEAS
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- Andrew Hughes Hallett & Jan Libich & Petr Stehlik, 2007.
"Rogoff Revisited: The Conservative Central Banker Proposition Under Active Fiscal Policies,"
CAMA Working Papers
2007-20, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
- Hughes Hallett, Andrew & Libich, Jan & Stehlík, Petr, 2009. "Rogoff revisited: The conservative central banker proposition under active fiscal policies," Economics Letters, Elsevier, vol. 104(3), pages 140-143, September.
- de Zeeuw, A.J. & van der Ploeg, F., 1987.
"Difference games and policy evaluation : A conceptual framework,"
FEW 268, Tilburg University, School of Economics and Management.
- de Zeeuw, A J & van der Ploeg, F, 1991. "Difference Games and Policy Evaluation: A Conceptual Framework," Oxford Economic Papers, Oxford University Press, vol. 43(4), pages 612-36, October.
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