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Interactions of Commitment and Discretion in Monetary and Fiscal Policies

  • Avinash Dixit

    ()

    (Princeton University)

  • Luisa Lambertini

    ()

    (Boston College)

We consider monetary-fiscal interactions when the monetary authority is more conservative than the fiscal. With both policies discretionary, (1) Nash equilibrium yields lower output and higher price than the ideal points of both authorities, (2) of the two leadership possibilities, fiscal leadership is generally better. With fiscal discretion, monetary commitment yields the same outcome as discretionary monetary leadership for all realizations of shocks. But fiscal commitment is not similarly negated by monetary discretion. Second-best outcomes require either joint commitment, or identical targets for both authorities -- output socially optimal and price level appropriately conservative -- or complete separation of tasks.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 575.

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Date of creation: 05 Jun 2003
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Publication status: published, American Economic Review, December 2003
Handle: RePEc:boc:bocoec:575
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  11. Beetsma Roel M.W.J. & Bovenberg A. Lans, 1995. "Monetary union without fiscal coordination may discipline policymakers," Research Memorandum 024, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
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