Is Delegating Half of Demand Management Sensible?

Neil Rankin

International Review of Applied Economics, 1998, vol. 12, issue 3, 415-422

Abstract: One objection to delegating monetary policy to an independent central bank is that it causes lack of coordination with fiscal policy. Nordhaus has recently shown, in a simple game-theoretic model, how this generates too-contractionary monetary policy and too-expansionary fiscal policy, with interest rates becoming excessively high. In this note we incorporate the time-consistency, inflation-bias problem into the analysis, since it is this that has motivated most proposals for granting independence. We show that when the inflation-suppressing benefits are modelled alongside the high-interests rate costs, delegation may still be, on balance, against society's interests.

Date: 1998
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Working Paper: Is Delegating Half of Demand Management Sensible? (1995)
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DOI: 10.1080/02692179800000016

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