Fiscal Constraints on Central Bank Independence and Price Stability
We use a new theory of price determination – developed by Woodford, Simms and others – to characterize central bank independence and price stability. If fiscal policy guarantees that the price level is determined independently of government’s present value budget constraint, we can say that the central bank is operating in a monetary dominant regime; it has the ‘functional independence’ necessary to control the price level independently of the dictates of fiscal solvency (if it so chooses), and it can be held accountable for price stability (if that is its mandate). If fiscal policy does not allow this, we say the central bank is operating in a fiscal dominant regime. Numerical exercises suggest that price stability may be beyond the control of the central bank in such a regime. We show that strict enforcement of the Maastricht Treaty’s deficit criterion would ensure a monetary dominant regime.
|Date of creation:||Sep 1996|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:1463. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()The email address of this maintainer does not seem to be valid anymore. Please ask to update the entry or send us the correct address
If references are entirely missing, you can add them using this form.