Central Bank Credibility and Fiscal Responsibility

Jesse Schreger, Pierre Yared and Emilio Zaratiegui

American Economic Review: Insights, 2024, vol. 6, issue 3, 377-94

Abstract: We consider a New Keynesian model with strategic monetary and fiscal interactions. The fiscal authority maximizes social welfare. Monetary policy is delegated to a central bank with an anti-inflation bias that suffers from a lack of commitment. The impact of central bank hawkishness on debt issuance is nonmonotonic because increased hawkishness reduces the benefit from fiscal stimulus while simultaneously increasing real debt capacity. Starting from high levels of hawkishness (dovishness), a marginal increase in the central bank's anti-inflation bias decreases (increases) debt issuance.

JEL-codes: E12 E31 E52 E58 E62 H63 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1257/aeri.20230263

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