Institution Design for Macroeconomic Policy

Alexander Mihailov () and Katrin Ullrich ()
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Katrin Ullrich: KfW Bankengruppe, Frankfurt (Main)

No em-dp2015-01, Economics Discussion Papers from Department of Economics, University of Reading

Abstract: This paper explores the normative aspects of the institution design for macroeconomic policymaking when a society legislates specific objectives and sequencing of decisions for the involved authorities. We develop a general theoretical framework that adds fiscal policy to the flexibility-credibility trade-off well-established in monetary policy. We find that delegation of both monetary and fiscal policy to autonomous institutions of appointed experts improves macroeconomic outcomes by delivering lower average inflation and lower average public-sector deficit-to-output ratio over alternative policies conducted with interference by elected politicians. Yet greater independence of monetary and fiscal policymakers from the government also generates increased output variability around normal output. The latter effect is minor in magnitude, and the simulated expected social losses in all considered 24 institution-design regimes demonstrate the long-run welfare dominance of delegation of both monetary and fiscal policy to independent expert committees over joint government optimization. In addition, preannouncing an escape clause to be activated following extreme negative shocks may help mitigate short-run output and employment fluctuations, but at the cost of expected social losses that rise considerably.

Keywords: delegation; independence; expert committees; monetary-fiscal interactions; policy games; institution design (search for similar items in EconPapers)
JEL-codes: E02 E61 E63 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2015-02-05
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:rdg:emxxdp:em-dp2015-01

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