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Inflation-Conservatism and Monetary-Fiscal Policy Interactions

Author

Listed:
  • Andrew P. Blake

    (Bank of England)

  • Tatiana Kirsanova

    (Department of Economics, University of Exeter)

Abstract

This paper investigates the stabilization bias that arises in a model of monetary and fiscal policy stabilization of the economy, when assuming that the monetary authority put higher weight on inflation stabilization than society. We demonstrate that inflation-conservatism unambiguously leads to social welfare losses if the fiscal authority acts strategically. Although the precise form of monetary-fiscal interactions depends on the choice of fiscal instrument and on the level of steady state debt, the assessment of gains is robust to these assumptions. We also study how the outcome of stabilization depends on the leadership structure. We develop an algorithm that computes leadership equilibria as well in much wider spectrum of problems with strategic agents

Suggested Citation

  • Andrew P. Blake & Tatiana Kirsanova, 2008. "Inflation-Conservatism and Monetary-Fiscal Policy Interactions," Discussion Papers 0801, University of Exeter, Department of Economics.
  • Handle: RePEc:exe:wpaper:0801
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    File URL: http://people.exeter.ac.uk/RePEc/dpapers/DP0801.pdf
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    References listed on IDEAS

    as
    1. Hughes Hallett, Andrew & Libich, Jan & Stehlík, Petr, 2009. "Rogoff revisited: The conservative central banker proposition under active fiscal policies," Economics Letters, Elsevier, vol. 104(3), pages 140-143, September.
    2. de Zeeuw, A J & van der Ploeg, F, 1991. "Difference Games and Policy Evaluation: A Conceptual Framework," Oxford Economic Papers, Oxford University Press, vol. 43(4), pages 612-636, October.
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    Citations

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    Cited by:

    1. CUHAL, Radu & STARIȚÎNA, Ludmila & BASISTÎI, Nicolae, 2014. "Monetary Policy Regimes: Functional Framework And Implications," Journal of Financial and Monetary Economics, Centre of Financial and Monetary Research "Victor Slavescu", vol. 1(1), pages 92-100.
    2. Tatiana Kirsanova & Stephanus le Roux, 2013. "Commitment vs. Discretion in the UK: An Empirical Investigation of the Monetary and Fiscal Policy Regime," International Journal of Central Banking, International Journal of Central Banking, vol. 9(4), pages 99-152, December.
    3. Fragetta, Matteo & Kirsanova, Tatiana, 2010. "Strategic monetary and fiscal policy interactions: An empirical investigation," European Economic Review, Elsevier, vol. 54(7), pages 855-879, October.
    4. Celsa Machado & Ana Paula Ribeiro, 2011. "Stabilization Constraints from different-average Public Debt Levels in a Monetary Union with Country-size Asymmetry," EcoMod2011 3152, EcoMod.
    5. Bai, Yuting & Kirsanova, Tatiana & Leith, Campbell, 2017. "Nominal targeting in an economy with government debt," European Economic Review, Elsevier, vol. 94(C), pages 103-125.
    6. Victoria Nuguer & Jessica Roldan-Pena & Enrique Mendoza & Julio Carrillo, 2016. "When the Central Bank Meets the Financial Authority: Strategic Interactions and Institutional Design," 2016 Meeting Papers 1461, Society for Economic Dynamics.
    7. repec:ijc:ijcjou:y:2018:q:2:a:5 is not listed on IDEAS
    8. repec:agr:journl:v:xxiv:y:2017:i:2(611):p:99-110 is not listed on IDEAS
    9. Garreth Rule, 2012. "Collateral management in central bank policy operations," Handbooks, Centre for Central Banking Studies, Bank of England, edition 1, number 31, March.
    10. repec:eee:macchp:v2-2305 is not listed on IDEAS
    11. repec:taf:oabmxx:v:3:y:2016:i:1:p:1154283 is not listed on IDEAS
    12. Garreth Rule, 2011. "Issuing central bank securities," Handbooks, Centre for Central Banking Studies, Bank of England, edition 1, number 30, March.
    13. Tatiana Kirsanova & Celsa Machado & Ana Paula Ribeiro, 2018. "Should the ECB Coordinate EMU Fiscal Policies?," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 237-280, June.
    14. Yuting Bai & Tatiana Kirsanova, 2013. "Infrequent Fiscal Stabilization," Working Papers 2013_01, Business School - Economics, University of Glasgow.
    15. Muhammad Ali Nasir & Alaa M. Soliman, 2014. "Aspects of Macroeconomic Policy Combinations and Their Effects on Financial Markets," Economic Issues Journal Articles, Economic Issues, vol. 19(1), pages 95-118, March.
    16. Bianca De Paoli & Matthias Paustian, 2013. "Coordinating monetary and macroprudential policies," Staff Reports 653, Federal Reserve Bank of New York.
    17. Paulo Vieira & Celsa Machado & Ana Paula Ribeiro, 2016. "Optimal Fiscal Simple Rules for Small and Large Countries of a Monetary Union," EcoMod2016 9685, EcoMod.
    18. Yuting Bai, 2014. "Price level targeting with strategic fiscal policy and the value of fiscal leadership," Working Papers 66983487, Lancaster University Management School, Economics Department.

    More about this item

    Keywords

    Monetary and Fiscal Policy; Policy Delegation; Discretion; Leadership Equilibria;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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