Monetary and fiscal policy interactions with central bank transparency and public investment

Meixing Dai () and Moïse Sidiropoulos ()
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Moïse Sidiropoulos: BETA - Bureau d'Économie Théorique et Appliquée - INRA - Institut National de la Recherche Agronomique - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique, Aristotle University of Thessaloniki

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Abstract: In this paper, we study how the interactions between central bank transparency and fiscal policy affect macroeconomic performance and volatility, in a framework where productivity-enhancing public investment could improve future growth potential. We analyze the effects of the central bank's opacity (lack of transparency) according to the marginal effect of public investment by considering the Stackelberg equilibrium, where the government is the first mover and the central bank the follower. We show that the optimal choice of tax rate and public investment, when the public investment is highly productivity enhancing, eliminates the effects of distortionary taxation and fully counterbalance both the direct and the fiscal-disciplining effects of opacity, on the level and variability of inflation and the output gap. In the case where the public investment is not sufficiently productivity enhancing, opacity could still have some disciplining effects as in the benchmark model, which ignores the effects of public investment.

Keywords: Distortionary taxes; Output distortions; Productivity-enhancing public investment; Central bank transparency (opacity); Fiscal-disciplining effect (search for similar items in EconPapers)
Date: 2011-09
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Citations: View citations in EconPapers (7)

Published in Research in Economics, 2011, 65 (3), pp.195-208. ⟨10.1016/j.rie.2010.09.002⟩

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Journal Article: Monetary and fiscal policy interactions with central bank transparency and public investment (2011)
Working Paper: Monetary and fiscal policy interactions with central bank transparency and public investment (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03692278

DOI: 10.1016/j.rie.2010.09.002

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