Fiscal Policy and Imperfectly Credible Targets: Should We Appoint Expenditure-Conservative Central Bankers?
We reconsider Svensson’s inflation-targeting proposal in a model where the need to raise seigniorage revenues determines the socially optimal inflation rate and distortionary taxes cause the inflation bias. Interpreting the targets as contracts, we show that the interaction between fiscal and monetary policy complicates the structure of the optimal contract. Moreover, if the commitment technology is imperfect, “highish” targets generate lower inflation than targets which are too low to be credible. Then we turn to an interpretation of inflation targets as monetary policy delegation to a nondistortionary, target-conservative agent. In our model target-conservative bankers are public-expenditure conservative. Expenditure-conservatism may explain why central bank independence is orthogonal to output variability.
|Date of creation:||Jul 1997|
|Date of revision:||Jul 1997|
|Contact details of provider:|| Postal: |
Phone: +39 02 6448 3089
Fax: +39 02 6448 3085
Web page: http://dipeco.economia.unimib.it
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gylfason, Thorvaldur & Herbertsson, Tryggvi Thor, 1996.
"Does Inflation Matter for Growth?,"
CEPR Discussion Papers
1503, C.E.P.R. Discussion Papers.
- Bernanke, Ben S. & Mihov, Ilian, 1997.
"What does the Bundesbank target?,"
European Economic Review,
Elsevier, vol. 41(6), pages 1025-1053, June.
- Alesina, Alberto & Roubini, Nouriel, 1992.
"Political Cycles in OECD Economies,"
Review of Economic Studies,
Wiley Blackwell, vol. 59(4), pages 663-88, October.
- Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December.
- Lars E.O. Svensson, 1993.
"The Simplest Test of Inflation Target Credibility,"
NBER Working Papers
4604, National Bureau of Economic Research, Inc.
- Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
- McCallum, Bennett T, 1995.
"Two Fallacies Concerning Central-Bank Independence,"
American Economic Review,
American Economic Association, vol. 85(2), pages 207-11, May.
- Bennett T. McCallum, 1995. "Two Fallacies Concerning Central Bank Independence," NBER Working Papers 5075, National Bureau of Economic Research, Inc.
- 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.
- Roubini, Nouriel & Alesina, Alberto, 1992. "Political Cycles in OECD Economies," Scholarly Articles 4553025, Harvard University Department of Economics.
- Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
- Alesina, Alberto & Tabellini, Guido, 1987. "Rules and Discretion with Noncoordinated Monetary and Fiscal Policies," Economic Inquiry, Western Economic Association International, vol. 25(4), pages 619-30, October.
- Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May.
- Sweeney, Richard J, 1987. "Some Macro Implications of Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(2), pages 222-34, May.
- 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.
- Christopher J. Waller, 1995. "Performance contracts for central bankers," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 3-14.
When requesting a correction, please mention this item's handle: RePEc:mib:wpaper:06. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roberto Reale)
If references are entirely missing, you can add them using this form.