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Is Delegating Half of Demand Management Sensible?

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  • Rankin, Neil

Abstract

A 1990s view is that inflation is best avoided by delegating monetary policy to an independent central bank. However most analyses overlook fiscal policy, which cannot be delegated. Here we make a very simple extension of the usual policy game by introducing the government as a third player, in charge of a fiscal instrument for demand management. If the government delegates monetary policy, there will be a battle over aggregate demand. Although the bank wins, so that inflation is avoided, it is as the cost of an excessive interest rate. Society's welfare may be lower than with no delegation.

Suggested Citation

  • Rankin, Neil, 1995. "Is Delegating Half of Demand Management Sensible?," The Warwick Economics Research Paper Series (TWERPS) 443, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:443
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    File URL: https://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/1995-1998/twerp443.pdf
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    Cited by:

    1. Gartner, Manfred, 2000. " Political Macroeconomics: A Survey of Recent Developments," Journal of Economic Surveys, Wiley Blackwell, vol. 14(5), pages 527-561, December.
    2. Pusch, Toralf, 2007. "Verteilungskampf und geldpolitische Sanktion," Working Papers on Economic Governance 23, University of Hamburg, Department of Socioeconomics.
    3. Demertzis, Maria & Hughes Hallett, Andrew & Viegi, Nicola, 2004. "An independent central bank faced with elected governments," European Journal of Political Economy, Elsevier, vol. 20(4), pages 907-922, November.
    4. M. Demertzis & A. Hughes Hallett & N. Viegi, 2002. "An Independent Central Bank faced with Elected Government: A Political Economy Conflict," WO Research Memoranda (discontinued) 686, Netherlands Central Bank, Research Department.
    5. Pusch, Toralf & Heise, Arne, 2008. "Central Banks, Trade Unions and Reputation – Is there Room for an Expansionist Manoeuvre in the European Union?," MPRA Paper 19719, University Library of Munich, Germany.
    6. Maria Demertzis & Andrew Hughes Hallett & Nicola Viegi, 1999. "Can the ECB be Truly Independent? Should It Be?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 26(3), pages 217-240, September.

    More about this item

    Keywords

    Central Bank Independence ; Monetary-fiscal coordination ; demand Management;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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