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Policy Uncertainty, Symbiosis, and the Optimal Fiscal and Monetary Conservativeness

  • Giovanni Di Bartolomeo

    ()

    (University of Teramo)

  • Marco Manzo
  • Francesco Giuli

This paper extends a well-known macroeconomic stabilization game between monetary and fiscal authorities introduced by Dixit and Lambertini (American Economic Review, 93: 1522-1542) to multiplicative (policy) uncertainty. We find that even if fiscal and monetary authorities share a common output and inflation target (i.e. the symbiosis assumption), the achievement of the common targets is no longer guaranteed; under multiplicative uncertainty, in fact, a time consistency problem arises unless policymakers� output target is equal to the natural level.

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Paper provided by University of Crete, Department of Economics in its series Working Papers with number 0802.

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Length: 24 pages
Date of creation: 17 Feb 2008
Date of revision:
Handle: RePEc:crt:wpaper:0802
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  1. Rudebusch, Glenn D., 2000. "Assessing nominal income rules for monetary policy with model and data uncertainty," Working Paper Series 0014, European Central Bank.
  2. Kreps, David M., 1990. "Game Theory and Economic Modelling," OUP Catalogue, Oxford University Press, number 9780198283812.
  3. Arturo Estrella & Frederic Mishkin, 1998. "Rethinking the role of NAIRU in monetary policy: implications of model formulation and uncertainty," Research Paper 9806, Federal Reserve Bank of New York.
  4. Alan J. Auerbach & Kevin A. Hassett, 2002. "Optimal Long-Run Fiscal Policy: Constraints, Preferences and the Resolution of Uncertainty," NBER Working Papers 9132, National Bureau of Economic Research, Inc.
  5. Michael Woodford & Pierpaolo Benigno, 2004. "Inflation Stabilization and Welfare: The Case of a Distorted Steady State," 2004 Meeting Papers 481, Society for Economic Dynamics.
  6. Avinash Dixit & Luisa Lambertini, 2003. "Interactions of Commitment and Discretion in Monetary and Fiscal Policies," Boston College Working Papers in Economics 575, Boston College Department of Economics.
  7. Svensson, Lars E O, 1999. " Inflation Targeting: Some Extensions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(3), pages 337-61, September.
  8. Dixit, Avinash & Lambertini, Luisa, 2001. "Monetary-fiscal policy interactions and commitment versus discretion in a monetary union," European Economic Review, Elsevier, vol. 45(4-6), pages 977-987, May.
  9. repec:cup:macdyn:v:6:y:2002:i:1:p:111-44 is not listed on IDEAS
  10. Glenn D. Rudebusch, 1999. "Is the Fed too timid? Monetary policy in an uncertain world," Working Papers in Applied Economic Theory 99-05, Federal Reserve Bank of San Francisco.
  11. Peersman, Gert & Smets, Frank, 1999. "The Taylor Rule: A Useful Monetary Policy Benchmark for the Euro Area?," International Finance, Wiley Blackwell, vol. 2(1), pages 85-116, April.
  12. Douglas Hostland & David Dupuis, . "The Implications of Parameter Uncertainty for Medium-Term Fiscal Planning," Working Papers-Department of Finance Canada 2001-21, Department of Finance Canada.
  13. Letterie, Wilko, 1997. " Better Monetary Control May Decrease the Distortion of Stabilisation Policy: A Comment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(3), pages 463-70, September.
  14. Dixit, Avinash & Lambertini, Luisa, 2003. "Symbiosis of monetary and fiscal policies in a monetary union," Journal of International Economics, Elsevier, vol. 60(2), pages 235-247, August.
  15. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  16. Pierpaolo Benigno & Michael Woodford, 2005. "Optimal Taxation in an RBC Model: A Linear-Quadratic Approach," NBER Working Papers 11029, National Bureau of Economic Research, Inc.
  17. Schellekens, Philip, 2002. "Caution and Conservatism in the Making of Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 160-77, February.
  18. Söderström, Ulf, 2000. "Monetary policy with uncertain parameters," Working Paper Series 0013, European Central Bank.
  19. Lawler, Phillip, 2002. "Monetary uncertainty, strategic wage setting and equilibrium employment," Economics Letters, Elsevier, vol. 77(1), pages 35-40, September.
  20. Thomas Sargent & Noah Williams & Tao Zha, 2006. "The conquest of South American inflation," Working Paper 2006-20, Federal Reserve Bank of Atlanta.
  21. Luisa Lambertini, 2006. "Monetary-Fiscal Interactions With A Conservative Central Bank," Scottish Journal of Political Economy, Scottish Economic Society, vol. 53(1), pages 90-128, 02.
  22. Auerbach, Alan J & Hassett, Kevin A, 2002. "Fiscal Policy and Uncertainty," International Finance, Wiley Blackwell, vol. 5(2), pages 229-49, Summer.
  23. Giannoni, Marc P., 2002. "Does Model Uncertainty Justify Caution? Robust Optimal Monetary Policy In A Forward-Looking Model," Macroeconomic Dynamics, Cambridge University Press, vol. 6(01), pages 111-144, February.
  24. Rudi Dornbusch & Carlo Favero & Francesco Giavazzi, 1998. "Immediate challenges for the European Central Bank," Economic Policy, CEPR;CES;MSH, vol. 13(26), pages 15-64, 04.
  25. Marcellino, Massimiliano & Stock, James H. & Watson, Mark W., 2003. "Macroeconomic forecasting in the Euro area: Country specific versus area-wide information," European Economic Review, Elsevier, vol. 47(1), pages 1-18, February.
  26. Pearce, Douglas K. & Sobue, Motoshi, 1997. "Uncertainty and the inflation bias of monetary policy," Economics Letters, Elsevier, vol. 57(2), pages 203-207, December.
  27. Rudiger Dornbusch & Carlo A. Favero & Francesco Giavazzi, 1998. "The Immediate Challenges for the European Central Bank," NBER Working Papers 6369, National Bureau of Economic Research, Inc.
  28. Walsh, Carl E, 2003. " Accountability, Transparency, and Inflation Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 829-49, October.
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