Interactions of Commitment and Discretion in Monetary and Fiscal Policies

We consider monetary-fiscal interactions when the monetary authority is more conservative than the fiscal. With both policies discretionary, (1) Nash equilibrium yields lower output and higher price than the ideal points of both authorities, (2) of the two leadership possibilities, fiscal leadership is generally better. With fiscal discretion, monetary commitment yields the same outcome as discretionary monetary leadership for all realizations of shocks. But fiscal commitment is not similarly negated by monetary discretion. Second-best outcomes require either joint commitment, or identical targets for both authorities -output socially optimal and price level appropriately conservative- or complete separation of tasks.


Published in:
American Economic Review, 93, 5, 1522-1542
Year:
2003
Note:
JEL E61, E63
Laboratories:




 Record created 2007-07-16, last modified 2018-03-17

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