Fiscal policy, institutional quality and central bank transparency

Meixing Dai (dai@unistra.fr), Moise Sidiropoulos and Eleftherios Spyromitros

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

Abstract: This paper examines monetary and fiscal interactions in a framework where the government worries about political costs of low institutional quality and central bank opacity acts as a disciplinary device leading the government to reduce distortionary taxes and public expenditures. Greater opacity could thus lower the reactions of inflation expectations and inflation but increase those of the output gap to supply shocks and the target of public expenditures, and would be beneficial in terms of less macroeconomic volatility. Under the least favourable assumptions on the effect of corruption, i.e. ‘sanding-the-wheels’ effect or weak ‘greasing-the-wheels’ effect, we have shown that there is a fiscal disciplining effect of central bank opacity in a game framework where the government is a Stackelberg leader. Imperfect transparency could increase corruption only if the ‘greasing-the-wheels’ effect is relatively large. These results could be reinforced by the presence of grand corruption.

Keywords: Central bank opacity; fiscal disciplining effect; distortions; institutional quality; corruption. (search for similar items in EconPapers)
JEL-codes: D73 E52 E58 E61 E63 H50 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-cba, nep-ger, nep-mac and nep-mon
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Related works:
Journal Article: Fiscal Policy, Institutional Quality and Central Bank Transparency (2015)
Working Paper: Fiscal policy, institutional quality and central bank transparency (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2014-04

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