Rules and Discretion with Noncoordinated Monetary and Fiscal Policies
The time inconsistency of optimal monetary policy is due to the effects of tax distortions. Thus, the issue of how to im prove upon the time-consistent suboptimal monetary policy is related to that of the coordination of monetary and fiscal policy. The author s present a model with three players (the central bank, the fiscal au thority, and wage setters) in which distortionary taxes are explicitl y modeled. They show that binding commitments to monetary rules are n ot necessarily welfare improving if monetary and fiscal policy are no t coordinated. They also examine the effects of different degrees of independence of the central bank. Copyright 1987 by Oxford University Press.
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Volume (Year): 25 (1987)
Issue (Month): 4 (October)
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