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Dynamic Seigniorage Models Revisited. Should Fiscal Flexibility and Conservative Central Bankers Go Together?

  • Patrizio Tirelli

    ()

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

This paper presents a dynamic seigniorage model where excessive debt levels persist in steady state, causing a permanent inflation bias. Discretionary monetary responses to shocks are too interventionist because they do not take into account the role of debt policy, which spreads part of the adjustment onto future periods. Institutional design should contemplate the appointment of weight-conservative central bankers. The central bank preferences should be more conservative the more the government is willing to delay the adjustment of expenditures following a supply shock. The combination of fiscal intervention and a zero inflation rule describes how members of a monetary union might react to asymmetric shocks. The costs of this regime are negligible if the discount factor is small and seigniorage losses are limited.

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File URL: http://dipeco.economia.unimib.it/repec/pdf/mibwpaper19.pdf
File Function: First version, 1997
Download Restriction: no

Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 19.

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Length: 23 pages
Date of creation: Jul 1997
Date of revision: Feb 1999
Handle: RePEc:mib:wpaper:19
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  1. 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.
  2. Maurice Obstfeld, 1989. "Dynamic Seigniorage Theory: An Exploration," NBER Working Papers 2869, National Bureau of Economic Research, Inc.
  3. van der Ploeg, Frederick, 1995. "Political Economy of Monetary and Budgetary Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 427-39, May.
  4. Anton Muscatelli, 1998. "Inflation Contracts And Inflation Targets Under Uncertainty: Why We Might Need Conservative Bankers," Working Papers 9801, Business School - Economics, University of Glasgow.
  5. 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.
  6. Muscatelli, V Anton, 1999. "Inflation Contracts and Inflation Targets under Uncertainty: Why We Might Need Conservative Central Bankers," Economica, London School of Economics and Political Science, vol. 66(262), pages 241-54, May.
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