Accounting for Credibility: Fiscal-Monetary Interactions and the Credibility of Central Bank Mandates

Luigi Bocola, Gastón Chaumont, Alessandro Dovis and Rishabh Kirpalani

No 35691, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a model for fiscal and monetary policy determination in the tradition of Sargent and Wallace (1981). Ex-ante, the government has incentives to delegate monetary policy to a central bank with an inflation targeting mandate. Ex-post, however, the government faces temptations to revoke the mandate to generate seigniorage revenues. The likelihood that the government will adhere to its commitment depends on shocks to fiscal fundamentals and the costs of reneging on the mandate. The economy endogenously transitions between a “monetary-dominant” regime where monetary policy adheres to its commitment and a “fiscal-dominant” regime where the fiscal authority interferes with monetary policy. These two regimes sharply differ in their implications for the comovement of inflation and debt-to-GDP ratios. We use the model as a measurement device to interpret the fiscal and monetary history in Colombia, Chile, and the U.S.

JEL-codes: E0 E50 E6 (search for similar items in EconPapers)
Date: 2026-08
Note: EFG IFM ME
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