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Distortionary Fiscal Policy and Monetary Policy Goals

  • Adam, Klaus

    ()

    (Mannheim University)

  • Billi, Roberto M.

    ()

    (Monetary Policy Department, Central Bank of Sweden)

We reconsider the role of an inflation conservative central banker in a setting with distortionary taxation. To do so, we assume monetary and fiscal policy are decided by independent authorities that do not abide to past commitments. If the two authorities make policy decisions simultaneously, inflation conservatism causes fiscal overspending. But if fiscal policy is determined before monetary policy, inflation conservatism imposes fiscal discipline. These results clarify that in our setting the value of inflation conservatism depends crucially on the timing of policy decisions.

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File URL: http://www.riksbank.se/Documents/Rapporter/Working_papers/2013/rap_wp278_131010.pdf
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Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 278.

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Length: 24 pages
Date of creation: 01 Oct 2013
Date of revision:
Handle: RePEc:hhs:rbnkwp:0278
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Sveriges Riksbank, SE-103 37 Stockholm, Sweden

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Web page: http://www.riksbank.com/
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  1. Adam, Klaus & Billi, Roberto M., 2008. "Monetary conservatism and fiscal policy," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1376-1388, November.
  2. repec:esx:essedp:667 is not listed on IDEAS
  3. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  4. Giorgia Giovannetti & Ramon Marimon & Pedro Teles, 2000. "Nominal Debt as a Burden to Monetary Policy," Econometric Society World Congress 2000 Contributed Papers 1387, Econometric Society.
  5. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Optimal Fiscal and Monetary Policy Under Sticky Prices," NBER Working Papers 9220, National Bureau of Economic Research, Inc.
  6. Niemann, Stefan, 2009. "Dynamic Monetary-Fiscal Interactions and the Role of Monetary Conservatism," Economics Discussion Papers 2899, University of Essex, Department of Economics.
  7. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
  8. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  9. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  10. Adam, Klaus, 2010. "Government Debt and Optimal Monetary and Fiscal Policy," CEPR Discussion Papers 8064, C.E.P.R. Discussion Papers.
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