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Beyond The Design Of Monetary Policy Alone: Fiscal Commitment, Macro Coordination, And Structural Adjustment


  • Begg, David


Analysis of the design of institutions to counteract failures of monetary commitment has largely proceeded in a vacuum. It has ignored similar commitment problems in fiscal policy and in structural adjustment; and it has ignored coordination problems between monetary and fiscal policy. Optimal second-best monetary design will of course depend on the extent to which these other failures can also be solved. The Paper develops a model in which the extent of structural adjustment thus far accomplished influences the ability to raise non-distortionary tax revenue. A poor structural inheritance implies both a low current output, reduced by severe tax distortions, and the need to resort to high levels of the inflation tax. Low output and high inflation both reflect a poor structural inheritance, which can be improved by investing scarce current resources in structural improvements for the future. The chosen rate of adjustment is derived in various regimes. This framework leads naturally to a discussion of the appropriate form of delegated monetary independence, its relation to the ability to make fiscal and adjustment commitments, and the possible role that EMU may play. Clearly, monetary commitment alone cannot accomplish the first best, and might actually make things worse. The analysis offers insights about other forms of external conditionality that might be welfare-improving for transition economies hoping to accede to EMU. The analysis also highlights the danger of believing that a slimline IMF could confine itself to monetary and fiscal policy without worrying about structural adjustment.

Suggested Citation

  • Begg, David, 2000. "Beyond The Design Of Monetary Policy Alone: Fiscal Commitment, Macro Coordination, And Structural Adjustment," CEPR Discussion Papers 2637, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2637

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    References listed on IDEAS

    1. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March.
    2. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    3. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
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    Cited by:

    1. Nadine Leiner-Killinger & Víctor López Pérez & Roger Stiegert & Giovanni Vitale, 2007. "Structural reforms in EMU and the role of monetary policy – a survey of the literature," Occasional Paper Series 66, European Central Bank.
    2. Begg, David, 2002. "Growth, integration, and macroeconomic policy design: Some lessons for Latin America," The North American Journal of Economics and Finance, Elsevier, vol. 13(3), pages 279-295, December.
    3. Roel Beetsma & Lans Bovenberg, 2001. "Structural Distortions and Decentralized Fiscal Policies in EMU," CESifo Working Paper Series 473, CESifo Group Munich.

    More about this item


    EMU; Fiscal Policy; Monetary Policy; Structural Adjustment; Transition;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission


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