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Monetary policy, fiscal policy and cross signal jamming

Jeong-Yoo Kim and Hyung Sun Choi

Journal of Macroeconomics, 2023, vol. 75, issue C

Abstract: This paper considers the issue of rule versus discretion when the central bank and the government share private information but have different preferences over inflation and output. We demonstrate that if the monetary policy is rule-based, Intuitive Criterion selects the unique separating equilibrium in which the central bank signals a low supply shock by a low interest rate. Interestingly, discretion may be better than the rule for the central bank, contrary to the case of complete information. Also, we examine the effect of information asymmetry on the monetary and fiscal policy mix. We show that cross signal jamming whereby the monetary authority and the fiscal authority successfully jams an unfavorable signal of each other does not occur in equilibrium.

Keywords: Monetary policy; Fiscal policy; Signal; Cross signal jamming; Commitment; Time-inconsistency (search for similar items in EconPapers)
JEL-codes: E58 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:75:y:2023:i:c:s0164070422000933

DOI: 10.1016/j.jmacro.2022.103500

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