Monetary Commitment and Fiscal Discretion: The Optimal Policy Mix

Stefano Gnocchi

American Economic Journal: Macroeconomics, 2013, vol. 5, issue 2, 187-216

Abstract: We study a noncooperative policy game between monetary and fiscal policy, where only monetary policy can commit to future actions. The equilibrium outcome of the game depends on the strategies available to the monetary policymaker. If strategies are left unrestricted, the central bank can alter the incentives of the fiscal authority in a way that replicates the full commitment solution. If the central bank cannot commit to respond to fiscal policy, the fiscal authority generates fluctuations in government expenditure that undermine the stabilization goals of the central bank. (JEL E12, E23, E31, E52, E58, E62)

JEL-codes: E12 E23 E31 E52 E58 E62 (search for similar items in EconPapers)
Date: 2013
Note: DOI: 10.1257/mac.5.2.187
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Citations: View citations in EconPapers (7)

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