The Central Bank Strikes Back! Credibility of Monetary Policy under Fiscal Influence

Antoine Camous and Dmitry Matveev

Staff Working Papers from Bank of Canada

Abstract: How should independent central banks react if pressured by fiscal policymakers? We study an environment with strategic monetary-fiscal interactions where the central bank has a limited degree of commitment to follow policies over time and the fiscal authority has none. We contrast the implications of two monetary frameworks: one where the central bank follows a standard rule aiming exclusively at price stability against the other, where monetary policy additionally leans against fiscal influence. The latter rule improves economic outcomes by providing appropriate incentives to the fiscal authority. More importantly, the additional fiscal conditionality can enhance the credibility of the central bank to achieve price stability. We emphasize how the level and structure of government debt emerge as key factors affecting the credibility of monetary policy with fiscal conditionality.

Keywords: Credibility; Fiscal policy; Monetary policy (search for similar items in EconPapers)
JEL-codes: E02 E52 E58 E61 E62 (search for similar items in EconPapers)
Pages: 70 pages
Date: 2022-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:22-11

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