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Inflation Conservatism and Monetary-Fiscal Policy Interactions

Author

Listed:
  • Andrew P. Blake

    (Bank of England)

  • Tatiana Kirsanova

    (University of Exeter)

Abstract

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.

Suggested Citation

  • Andrew P. Blake & Tatiana Kirsanova, 2011. "Inflation Conservatism and Monetary-Fiscal Policy Interactions," International Journal of Central Banking, International Journal of Central Banking, vol. 7(2), pages 41-83, June.
  • Handle: RePEc:ijc:ijcjou:y:2011:q:2:a:2
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    References listed on IDEAS

    as
    1. 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 612-636, October.
    2. 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.
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    Citations

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    Cited by:

    1. Celsa Machado & Ana Paula Ribeiro, 2011. "Stabilization Constraints from different-average Public Debt Levels in a Monetary Union with Country-size Asymmetry," EcoMod2011 3152, EcoMod.
    2. Bianca De Paoli & Matthias Paustian, 2013. "Coordinating monetary and macroprudential policies," Staff Reports 653, Federal Reserve Bank of New York.
    3. Yuting Bai & Tatiana Kirsanova, 2013. "Infrequent Fiscal Stabilization," Working Papers 2013_01, Business School - Economics, University of Glasgow.
    4. Victoria Nuguer & Jessica Roldan-Pena & Enrique Mendoza & Julio Carrillo, 2016. "When the Central Bank Meets the Financial Authority: Strategic Interactions and Institutional Design," 2016 Meeting Papers 1461, Society for Economic Dynamics.
    5. Fragetta, Matteo & Kirsanova, Tatiana, 2010. "Strategic monetary and fiscal policy interactions: An empirical investigation," European Economic Review, Elsevier, vol. 54(7), pages 855-879, October.
    6. Tatiana Kirsanova & Stephanus le Roux, 2013. "Commitment vs. Discretion in the UK: An Empirical Investigation of the Monetary and Fiscal Policy Regime," International Journal of Central Banking, International Journal of Central Banking, vol. 9(4), pages 99-152, December.
    7. repec:eee:macchp:v2-2305 is not listed on IDEAS
    8. Muhammad Ali Nasir & Alaa M. Soliman, 2014. "Aspects of Macroeconomic Policy Combinations and Their Effects on Financial Markets," Economic Issues Journal Articles, Economic Issues, vol. 19(1), pages 95-118, March.
    9. Bai, Yuting & Kirsanova, Tatiana & Leith, Campbell, 2017. "Nominal targeting in an economy with government debt," European Economic Review, Elsevier, vol. 94(C), pages 103-125.
    10. Garreth Rule, 2012. "Collateral management in central bank policy operations," Handbooks, Centre for Central Banking Studies, Bank of England, edition 1, number 31.
    11. Garreth Rule, 2011. "Issuing central bank securities," Handbooks, Centre for Central Banking Studies, Bank of England, edition 1, number 30.
    12. Paulo Vieira & Celsa Machado & Ana Paula Ribeiro, 2016. "Optimal Fiscal Simple Rules for Small and Large Countries of a Monetary Union," EcoMod2016 9685, EcoMod.
    13. Yuting Bai, 2014. "Price level targeting with strategic fiscal policy and the value of fiscal leadership," Working Papers 66983487, Lancaster University Management School, Economics Department.
    14. repec:agr:journl:v:xxiv:y:2017:i:2(611):p:99-110 is not listed on IDEAS
    15. CUHAL, Radu & STARIȚÎNA, Ludmila & BASISTÎI, Nicolae, 2014. "Monetary Policy Regimes: Functional Framework And Implications," Journal of Financial and Monetary Economics, Centre of Financial and Monetary Research "Victor Slavescu", vol. 1(1), pages 92-100.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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