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Zero Inflation Targets: Central Bank Commitment and Fiscal Policy Outcomes

  • Peter J. Stemp

    ()

    (University of Melbourne)

  • William M. Scarth

    (McMaster University, Canada)

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    This paper considers a central bank with a zero inflation target and a fiscal authority with a differing objective. Situations under which the fiscal authority is able to exploit the central bank's commitment to zero inflation are examined. An example using a calibrated model shows that, in practice, it may be irrelevant whether or not the fiscal authority is aware of the central bank's objective.

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    File URL: http://www.unige.ch/ce/ce96/ps/stemp.eps
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    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 1996 with number _055.

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    Handle: RePEc:sce:scecf6:_055
    Contact details of provider: Postal: Department of Econometrics, University of Geneva, 102 Bd Carl-Vogt, 1211 Geneva 4, Switzerland
    Web page: http://www.unige.ch/ce/ce96/welcome.html

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    1. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
    2. 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.
    3. William D. Nordhaus, 1994. "Policy games: Coordination and Independece in Monetary and Fiscal Policies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 139-216.
    4. 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.
    5. D. Backus & J. Driffil, 1998. "Inflation and Reputation," Levine's Working Paper Archive 625, David K. Levine.
    6. Mankiw, N Gregory & Summers, Lawrence H, 1986. "Money Demand and the Effects of Fiscal Policies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(4), pages 415-29, November.
    7. Blackburn, Keith & Christensen, Michael, 1989. "Monetary Policy and Policy Credibility: Theories and Evidence," Journal of Economic Literature, American Economic Association, vol. 27(1), pages 1-45, March.
    8. 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.
    9. De Long, James Bradford & Summers, Lawrence H, 1986. "Is Increased Price Flexibility Stabilizing?," American Economic Review, American Economic Association, vol. 76(5), pages 1031-44, December.
    10. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    11. McCallum, Bennett T., 1978. "On macroeconomic instability from a monetarist policy rule," Economics Letters, Elsevier, vol. 1(2), pages 121-124.
    12. Michael R. Darby, 1984. "Some pleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
    13. Scarth, William M., 1980. "Rational expectations and the instability of bond-financing," Economics Letters, Elsevier, vol. 6(4), pages 321-327.
    14. Jensen, Henrik, 1994. "Loss of monetary discretion in a simple dynamic policy game," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 763-779.
    15. 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.
    16. Backus, David & Driffill, John, 1985. "Rational Expectations and Policy Credibility Following a Change in Regime," Review of Economic Studies, Wiley Blackwell, vol. 52(2), pages 211-21, April.
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