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