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CENTRAL BANK INDEPENDENCE AND THE MONETARY INSTRUMENT PROBLEM

Stefan Niemann, Paul Pichler and Gerhard Sorger ()

International Economic Review, 2013, vol. 54, issue 3, 1031-1055

Abstract: We study the monetary instrument problem in a dynamic noncooperative game between separate, discretionary, fiscal and monetary policy makers. We show that monetary instruments are equivalent only if the policy makers' objectives are perfectly aligned; otherwise an instrument problem exists. When the central bank is benevolent while the fiscal authority is short‐sighted relative to the private sector, excessive public spending and debt emerge under a money growth policy but not under an interest rate policy. Despite this property, the interest rate is not necessarily the optimal instrument.

Date: 2013
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https://doi.org/10.1111/iere.12027

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Working Paper: Central bank independence and the monetary instrument problem (2010) Downloads
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International Economic Review is currently edited by Michael O'Riordan and Dirk Krueger

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