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Government Leadership and Central Bank Design

Author

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  • Andrew Hughes Hallett

    () (Department of Economics, Vanderbilt University)

  • Diana N. Weymark

    () (Department of Economics, Vanderbilt University)

Abstract

This article investigates the impact on economic performance of the timing of moves in a policy game between the government and the central bank for a government with both distributional and stabilization objectives. It is shown that both inflation and income inequality are reduced without sacrificing output growth if the government assumes a leadership role compared to a regime in which monetary and fiscal policy is determined simultaneously. Further, it is shown that government leadership benefits both the fiscal and monetary authorities. The implications of these results for a country deciding whether to join a monetary union are also considered.

Suggested Citation

  • Andrew Hughes Hallett & Diana N. Weymark, 2002. "Government Leadership and Central Bank Design," Vanderbilt University Department of Economics Working Papers 0208, Vanderbilt University Department of Economics, revised Dec 2004.
  • Handle: RePEc:van:wpaper:0208
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    File Function: Revised version, 2004
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    References listed on IDEAS

    as
    1. Dave Turner & Elena Seghezza, 1999. "Testing for a Common OECD Phillips Curve," OECD Economics Department Working Papers 219, OECD Publishing.
    2. 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.
    3. Rich, Georg, 2000. "Monetary Policy without Central Bank Money: A Swiss Perspective," International Finance, Wiley Blackwell, vol. 3(3), pages 439-469, November.
    4. Barro, Robert J, 1981. "Output Effects of Government Purchases," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1086-1121, December.
    5. Nolan, Charles, 2002. "Monetary Stabilisation Policy in a Monetary Union: Some Simple Analytics," Scottish Journal of Political Economy, Scottish Economic Society, vol. 49(2), pages 196-215, May.
    6. Dixit, Avinash & Lambertini, Luisa, 2001. "Monetary-fiscal policy interactions and commitment versus discretion in a monetary union," European Economic Review, Elsevier, vol. 45(4-6), pages 977-987, May.
    7. Andrew Hughes Hallett & Diana N. Weymark, 2005. "Independence Before Conservatism: Transparency, Politics and Central Bank Design," German Economic Review, Verein für Socialpolitik, vol. 6(1), pages 1-21, February.
    8. A.J. Hallet, 1998. "When Do Target Zones Work? An Examination of Exchange Rate Targeting as a Device for Coordinating Economic Policies," Open Economies Review, Springer, vol. 9(2), pages 115-138, April.
    9. Gilles Oudiz & Jeffrey Sachs, 1984. "Macroeconomic Policy Coordination among the Industrial Economies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(1), pages 1-76.
    10. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    11. Andrew Hughes Hallett & Diana N. Weymark, 2002. "Policy Games and the Optimal Design of Central Banks," Vanderbilt University Department of Economics Working Papers 0220, Vanderbilt University Department of Economics.
    12. David Currie & Paul Levine, 1985. "Macroeconomic Policy Design in an Interdependent World," NBER Chapters,in: International Economic Policy Coordination, pages 228-273 National Bureau of Economic Research, Inc.
    13. Fischer, Stanley, 1995. "Central-Bank Independence Revisited," American Economic Review, American Economic Association, vol. 85(2), pages 201-206, May.
    14. Diana N. Weymark, 2001. "Inflation, Income Redistribution, and Optimal Central Bank Independence," Vanderbilt University Department of Economics Working Papers 0102, Vanderbilt University Department of Economics.
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    Citations

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    Cited by:

    1. Hughes Hallett, Andrew, 2005. "In Praise of Fiscal Restraint and Debt Rules. What the Euro Zone Might Do Now," CEPR Discussion Papers 5043, C.E.P.R. Discussion Papers.
    2. Weymark, Diana N., 2007. "Inflation, government transfers, and optimal central bank independence," European Economic Review, Elsevier, vol. 51(2), pages 297-315, February.
    3. Andrew Hughes Hallett, 2004. "Post-Thatcher Fiscal Strategies in the U.K.: An Interpretation," CESifo Working Paper Series 1372, CESifo Group Munich.
    4. Ullrich, Katrin, 2003. "Unabhängigkeit und Verantwortlichkeit der Europäischen Zentralbank," ZEW Discussion Papers 03-65, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

    More about this item

    Keywords

    Central bank independence; monetary policy delegation; policy coordination; policy game; policy leadership;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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