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Fiscal Policy and Imperfectly Credible Targets: Should We Appoint Expenditure-Conservative Central Bankers?

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Listed:
  • Marco Lossani

    (Catholic University of Milan)

  • Piergiovanna Natale

    () (Department of Economics, University of Milan-Bicocca)

  • Patrizio Tirelli

    () (Department of Economics, University of Milan-Bicocca and University of Glasgow)

Abstract

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.

Suggested Citation

  • Marco Lossani & Piergiovanna Natale & Patrizio Tirelli, 1997. "Fiscal Policy and Imperfectly Credible Targets: Should We Appoint Expenditure-Conservative Central Bankers?," Working Papers 06, University of Milano-Bicocca, Department of Economics, revised Jul 1997.
  • Handle: RePEc:mib:wpaper:06
    as

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    File URL: http://dems.unimib.it/repec/pdf/mibwpaper6.pdf
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    References listed on IDEAS

    as
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    12. McCallum, Bennett T, 1995. "Two Fallacies Concerning Central-Bank Independence," American Economic Review, American Economic Association, vol. 85(2), pages 207-211, May.
    13. Roubini, Nouriel & Alesina, Alberto, 1992. "Political Cycles in OECD Economies," Scholarly Articles 4553025, Harvard University Department of Economics.
    14. 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.
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