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Optimal Structure of Fiscal and Monetary Authorities

David Miller

Journal of Money, Credit and Banking, 2019, vol. 51, issue 2-3, 289-312

Abstract: Why are monetary authorities not elected like fiscal authorities are? Advanced economies pair an elected fiscal authority with an independent monetary authority. Replicating the advanced economies' structure with authorities microfounded by a political economy model shows that this structure is the solution to a constrained mechanism design problem that overcomes time inconsistency and results in the highest possible welfare. Goal and instrument independence, singly and in combination, are insufficient to minimize time inconsistency, though their combination is necessary.

Date: 2019
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Journal of Money, Credit and Banking is currently edited by Robert deYoung, Paul Evans, Pok-Sang Lam and Kenneth D. West

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Handle: RePEc:wly:jmoncb:v:51:y:2019:i:2-3:p:289-312