Rules and Discretion with Noncoordinated Monetary and Fiscal Policies

Alberto Alesina and Guido Tabellini

Economic Inquiry, 1987, vol. 25, issue 4, 619-30

Abstract: The time inconsistency of optimal monetary policy is due to the effects of tax distortions. Thus, the issue of how to im prove upon the time-consistent suboptimal monetary policy is related to that of the coordination of monetary and fiscal policy. The author s present a model with three players (the central bank, the fiscal au thority, and wage setters) in which distortionary taxes are explicitl y modeled. They show that binding commitments to monetary rules are n ot necessarily welfare improving if monetary and fiscal policy are no t coordinated. They also examine the effects of different degrees of independence of the central bank. Copyright 1987 by Oxford University Press.

Date: 1987
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