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Commitment vs. Discretion in the UK: An Empirical Investigation of the Monetary and Fiscal Policy Regime

  • Tatiana Kirsanova

    (University of Glasgow)

  • Stephanus le Roux

    (Department for Work and Pensions)

This paper investigates the conduct of monetary and fiscal policy in the post-ERM period in the United Kingdom. Using a simple DSGE New Keynesian model of non-cooperative monetary and fiscal policy interactions under fiscal intraperiod leadership, we demonstrate that the past policy in the United Kingdom is better explained by optimal policy under discretion than under commitment. We estimate policy objectives of both policymakers. We demonstrate that fiscal policy plays an important role in identifying the monetary policy regime.

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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 9 (2013)
Issue (Month): 4 (December)
Pages: 99-152

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Handle: RePEc:ijc:ijcjou:y:2013:q:4:a:4
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  1. Sungbae An & Frank Schorfheide, 2006. "Bayesian analysis of DSGE models," Working Papers 06-5, Federal Reserve Bank of Philadelphia.
  2. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
  3. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  4. Pelin lbas, 2010. "Estimation of Monetary Policy Preferences in a Forward-Looking Model: A Bayesian Approach," International Journal of Central Banking, International Journal of Central Banking, vol. 6(3), pages 169-209, September.
  5. Gregory Erin Givens, 2009. "Estimating Central Bank Preferences under Commitment and Discretion," Working Papers 200905, Middle Tennessee State University, Department of Economics and Finance.
  6. 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.
  7. John B. Taylor, 2000. "Reassessing Discretionary Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 21-36, Summer.
  8. Alejandro Justiniano & Bruce Preston, 2008. "Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances?," NBER Working Papers 14547, National Bureau of Economic Research, Inc.
  9. Marco Del Negro & Frank Schorfheide, 2004. "Priors from General Equilibrium Models for VARS," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 643-673, 05.
  10. King, Mervyn, 1997. "Changes in UK monetary policy: Rules and discretion in practice," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 81-97, June.
  11. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models—Rejoinder," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 211-219.
  12. Rabanal, Pau & Tuesta, Vicente, 2010. "Euro-dollar real exchange rate dynamics in an estimated two-country model: An assessment," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 780-797, April.
  13. Charles Wyplosz, 2005. "Fiscal Policy: Institutions versus Rules," National Institute Economic Review, National Institute of Economic and Social Research, vol. 191(1), pages 64-78, January.
  14. Richard Dennis, 2006. "The policy preferences of the US Federal Reserve," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(1), pages 55-77.
  15. Laura Coroneo & Valentina Corradi & Paulo Santos Monteiro, 2013. "Testing for optimal monetary policy via moment inequalities," Discussion Papers 13/07, Department of Economics, University of York.
  16. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  17. Tatiana Kirsanova & Campbell Leith & Simon Wren-Lewis, 2006. "Should Central Banks Target Consumer Prices or the Exchange Rate?," Economic Journal, Royal Economic Society, vol. 116(512), pages F208-F231, 06.
  18. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  19. repec:cup:cbooks:9780521441964 is not listed on IDEAS
  20. Philip Liu & Haroon Mumtaz, 2011. "Evolving Macroeconomic Dynamics in a Small Open Economy: An Estimated Markov Switching DSGE Model for the UK," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(7), pages 1443-1474, October.
  21. Pelin Ilbas, 2008. "Estimation of monetary policy preferences in a forward-looking model : a Bayesian approach," Working Paper Research 129, National Bank of Belgium.
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