Optimal Fiscal Stabilization Policy With Credible Central Bank Independence

Luca Lambertini () and Riccardo Rovelli

Working Papers from Dipartimento Scienze Economiche, Universita' di Bologna

Abstract: We study a model where monetary and fiscal policy share the task of stabilizing output and inflation, and the central bank has been assigned a mandate for the latter. The optimal fiscal policy does not imply assigning to the government a (symmetric) mandate to stabilize output. Instead, the optimal response to the aggregate demand and supply shocks may be characterized as equivalent to an automatic stabilizer. An alternative but equivalent characterization of fiscal policy is that the government should maximize a model social welfare function, respectively over (under) weighting the objective of price stability versus output stability when the relative size of aggregate demand vs supply shocks is large (small). This over (under) weighting of the two objectives is only apparent , as it is in fact the logical consequence of having defined the mandate of the central bank in terms of one objective only.

Date: 2002
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bol:bodewp:460

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