Inflation-Conservatism and Monetary-Fiscal Policy Interactions

Andrew Blake and Tatiana Kirsanova

No 801, Discussion Papers from University of Exeter, Department of Economics

Abstract: This paper investigates the stabilization bias that arises in a model of monetary and fiscal policy stabilization of the economy, when assuming that the monetary authority put higher weight on inflation stabilization than society. We demonstrate that inflation-conservatism unambiguously leads to social welfare losses if the fiscal authority acts strategically. Although the precise form of monetary-fiscal interactions depends on the choice of fiscal instrument and on the level of steady state debt, the assessment of gains is robust to these assumptions. We also study how the outcome of stabilization depends on the leadership structure. We develop an algorithm that computes leadership equilibria as well in much wider spectrum of problems with strategic agents

Keywords: Monetary and Fiscal Policy; Policy Delegation; Discretion; Leadership Equilibria (search for similar items in EconPapers)
JEL-codes: C61 E31 E52 E58 E61 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (7)

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Journal Article: Inflation Conservatism and Monetary-Fiscal Policy Interactions (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:exe:wpaper:0801

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