IDEAS home Printed from https://ideas.repec.org/p/hig/wpaper/102-ec-2015.html
   My bibliography  Save this paper

The Role of Uncertain Government Preferences For Fiscal and Monetary Policy Interaction

Author

Listed:
  • Olga S. Kuznetsova

    (National Research University Higher School of Economics)

  • Sergey A. Merzlyakov

    (National Research University Higher School of Economics)

Abstract

This paper explores the role of uncertain government preferences for fiscal and monetary policy interaction. Our analysis shows that the uncertainty about government preferences does not affect the macroeconomic equilibrium if the fiscal multiplier is known. In the case of multiplicative uncertainty, uncertain government preferences make fiscal policy more contractionary, while monetary policy becomes more expansionary. This leads to higher expected inflation and lower expected output, which means a stronger inflation bias

Suggested Citation

  • Olga S. Kuznetsova & Sergey A. Merzlyakov, 2015. "The Role of Uncertain Government Preferences For Fiscal and Monetary Policy Interaction," HSE Working papers WP BRP 102/EC/2015, National Research University Higher School of Economics.
    • Handle: RePEc:hig:wpaper:102/ec/2015
    as

    Download full text from publisher

    File URL: https://wp.hse.ru/data/2017/02/09/1167261586/102EC2015%20-%20%D0%BD%D0%BE%D0%B2%D1%8B%D0%B9.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. 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.
    2. Beetsma, Roel M. W. J. & Bovenberg, A. Lans, 1999. "Does monetary unification lead to excessive debt accumulation?," Journal of Public Economics, Elsevier, vol. 74(3), pages 299-325, December.
    3. Carsten Hefeker & Blandine Zimmer, 2010. "Central bank independence and conservatism under uncertainty: Substitutes or complements?," Volkswirtschaftliche Diskussionsbeiträge 140-10, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
    4. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    5. Meixing Dai & Moïse Sidiropoulos, 2011. "Fiscal disciplining effect of central bank opacity: Stackelberg versus Nash equilibrium," Economics Bulletin, AccessEcon, vol. 31(4), pages 3068-3076.
    6. Giovanni Di Bartolomeo & Francesco Giuli & Marco Manzo, 2009. "Policy uncertainty, symbiosis, and the optimal fiscal and monetary conservativeness," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 36(4), pages 461-474, November.
    7. Kobayashi, Teruyoshi, 2003. "Multiplicative uncertainty in a model without inflationary bias," Economics Letters, Elsevier, vol. 80(3), pages 317-321, September.
    8. Thomas J. Sargent & Neil Wallace, 1984. "Some Unpleasant Monetarist Arithmetic," Palgrave Macmillan Books, in: Brian Griffiths & Geoffrey E. Wood (ed.), Monetarism in the United Kingdom, pages 15-41, Palgrave Macmillan.
    9. De Grauwe, Paul & Senegas, Marc-Alexandre, 2006. "Monetary policy design and transmission asymmetry in EMU: Does uncertainty matter?," European Journal of Political Economy, Elsevier, vol. 22(4), pages 787-808, December.
    10. Oros, Cornel & Zimmer, Blandine, 2015. "Uncertainty and fiscal policy in a monetary union: Why does monetary policy transmission matter?," Economic Modelling, Elsevier, vol. 50(C), pages 85-93.
    11. Frost, Peter A, 1977. "Short-Run Fluctuations in the Money Multiplier and Monetary Control," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 9(1), pages 165-181, February.
    12. Sorge, Marco M., 2013. "Robust delegation with uncertain monetary policy preferences," Economic Modelling, Elsevier, vol. 30(C), pages 73-78.
    13. Andersen, Torben M. & Schneider, Friedrich, 1986. "Coordination of fiscal and monetary policy under different institutional arrangements," European Journal of Political Economy, Elsevier, vol. 2(2), pages 169-191.
    14. Ciccarone, Giuseppe & Marchetti, Enrico, 2009. "Revisiting the role of multiplicative uncertainty in a model without inflationary bias," Economics Letters, Elsevier, vol. 104(1), pages 37-39, July.
    15. Avinash Dixit & Luisa Lambertini, 2003. "Interactions of Commitment and Discretion in Monetary and Fiscal Policies," American Economic Review, American Economic Association, vol. 93(5), pages 1522-1542, December.
    16. Di Bartolomeo, Giovanni & Giuli, Francesco, 2011. "Fiscal and monetary interaction under monetary policy uncertainty," European Journal of Political Economy, Elsevier, vol. 27(2), pages 369-375, June.
    17. Alesina, Alberto & Tabellini, Guido, 1987. "Rules and Discretion with Noncoordinated Monetary and Fiscal Policies," Economic Inquiry, Western Economic Association International, vol. 25(4), pages 619-630, October.
    18. Alan S. Blinder, 1982. "Issues in the coordination of monetary and fiscal policies," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 3-46.
    19. Tabellini, Guido, 1986. "Money, debt and deficits in a dynamic game," Journal of Economic Dynamics and Control, Elsevier, vol. 10(4), pages 427-442, December.
    20. Sibert, Anne, 2002. "Monetary policy with uncertain central bank preferences," European Economic Review, Elsevier, vol. 46(6), pages 1093-1109, June.
    21. 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.
    22. Swank, Otto H, 1994. " Better Monetary Control May Increase the Inflationary Bias of Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(1), pages 125-131.
    23. Alan S. Blinder, 1982. "Issues in the Coordination of Monetary and Fiscal Policy," NBER Working Papers 0982, National Bureau of Economic Research, Inc.
    24. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    25. Hefeker, Carsten & Zimmer, Blandine, 2011. "The optimal choice of central bank independence and conservatism under uncertainty," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 595-606.
    26. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, May.
    27. repec:pri:cepsud:161blinder is not listed on IDEAS
    28. Pearce, Douglas K. & Sobue, Motoshi, 1997. "Uncertainty and the inflation bias of monetary policy," Economics Letters, Elsevier, vol. 57(2), pages 203-207, December.
    29. 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 473-491, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Pasquale Foresti, 2018. "Monetary And Fiscal Policies Interaction In Monetary Unions," Journal of Economic Surveys, Wiley Blackwell, vol. 32(1), pages 226-248, February.
    2. Sorge, Marco M., 2013. "Robust delegation with uncertain monetary policy preferences," Economic Modelling, Elsevier, vol. 30(C), pages 73-78.
    3. Di Bartolomeo, Giovanni & Giuli, Francesco, 2011. "Fiscal and monetary interaction under monetary policy uncertainty," European Journal of Political Economy, Elsevier, vol. 27(2), pages 369-375, June.
    4. D. Masciandaro, 2019. "What Bird Is That? Central Banking And Monetary Policy In The Last Forty Years," BAFFI CAREFIN Working Papers 19127, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    5. Masciandaro, Donato, 2022. "Independence, conservatism, and beyond: Monetary policy, central bank governance and central banker preferences (1981–2021)," Journal of International Money and Finance, Elsevier, vol. 122(C).
    6. Meixing Dai & Moïse Sidiropoulos, 2017. "How multiplicative uncertainty affects the tradeoff between information disclosure and stabilisation policy?," Working Papers of BETA 2017-15, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    7. Masciandaro, Donato & Romelli, Davide, 2015. "Ups and downs of central bank independence from the Great Inflation to the Great Recession: theory, institutions and empirics," Financial History Review, Cambridge University Press, vol. 22(3), pages 259-289, December.
    8. Meixing Dai & Qiao Zhang, 2013. "Central bank transparency with the cost channel," Working Papers of BETA 2013-06, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    9. Chortareas, Georgios & Mavrodimitrakis, Christos, 2021. "Policy conflict, coordination, and leadership in a monetary union under imperfect instrument substitutability," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 342-361.
    10. Leitemo, Kai, 2004. "A game between the fiscal and the monetary authorities under inflation targeting," European Journal of Political Economy, Elsevier, vol. 20(3), pages 709-724, September.
    11. Sergey Merzlyakov, 2012. "Strategic Interaction Between Fiscal and Monetary Policies in an Export-Oriented Economy," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 59(2), pages 201-216, May.
    12. Donato Masciandaro, 2021. "Central Bank Governance in Monetary Policy Economics (1981-2020)," BAFFI CAREFIN Working Papers 21153, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    13. Hefeker, Carsten & Zimmer, Blandine, 2011. "The optimal choice of central bank independence and conservatism under uncertainty," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 595-606.
    14. Martin, Fernando M., 2015. "Debt, inflation and central bank independence," European Economic Review, Elsevier, vol. 79(C), pages 129-150.
    15. Cornel OROS & Blandine ZIMMER, 2019. "Myopic governments and conservative central banks: are they compatible?," Working Papers of LaRGE Research Center 2019-06, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    16. Giovanni Di Bartolomeo & Marco Manzo, 2010. "Fiscal Policy Under Balanced Budget And Indeterminacy: A New Keynesian Perspective," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(4), pages 455-472, September.
    17. Donato Masciandaro & Davide Romelli, 2019. "Behavioral Monetary Policymaking: Economics, Political Economy and Psychology," World Scientific Book Chapters, in: Behavioral Finance The Coming of Age, chapter 9, pages 285-329, World Scientific Publishing Co. Pte. Ltd..
    18. Oros, Cornel & Zimmer, Blandine, 2015. "Uncertainty and fiscal policy in a monetary union: Why does monetary policy transmission matter?," Economic Modelling, Elsevier, vol. 50(C), pages 85-93.
    19. Meixing Dai, 2016. "Static And Dynamic Effects Of Central Bank Transparency," Bulletin of Economic Research, Wiley Blackwell, vol. 68(1), pages 55-78, January.
    20. Giovanni Di Bartolomeo & Francesco Giuli & Marco Manzo, 2009. "Policy uncertainty, symbiosis, and the optimal fiscal and monetary conservativeness," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 36(4), pages 461-474, November.

    More about this item

    Keywords

    fiscal and monetary policy interaction; multiplicative uncertainty; uncertain preferences.;
    All these keywords.

    JEL classification:

    • 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
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hig:wpaper:102/ec/2015. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Shamil Abdulaev or Shamil Abdulaev (email available below). General contact details of provider: https://edirc.repec.org/data/hsecoru.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.