Central Bank Credibility and Fiscal Responsibility

Jesse Schreger, Pierre Yared and Emilio Zaratiegui

No 31246, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We consider a New Keynesian model with strategic monetary and fiscal interactions. The fiscal authority maximizes social welfare. Monetary policy is delegated to a central bank with an anti-inflation bias that suffers from a lack of commitment. The impact of central bank hawkishness on debt issuance is non-monotonic because increased hawkishness reduces the benefit from fiscal stimulus while simultaneously increasing real debt capacity. Starting from high levels of hawkishness (dovishness), a marginal increase in the central bank's anti-inflation bias decreases (increases) debt issuance.

JEL-codes: E40 E44 E49 E50 E52 (search for similar items in EconPapers)
Date: 2023-05
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
Note: EFG IFM ME
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