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Monetary Commitment and Fiscal Discretion: The Optimal Policy Mix

Monetary Commitment and Fiscal Discretion: The Optimal Policy Mix Abstract We study a noncooperative policy game between monetary and fiscal policy, where only monetary policy can commit to future actions. The equilibrium outcome of the game depends on the strategies available to the monetary policymaker. If strategies are left unrestricted, the central bank can alter the incentives of the fiscal authority in a way that replicates the full commitment solution. If the central bank cannot commit to respond to fiscal policy, the fiscal authority generates fluctuations in government expenditure that undermine the stabilization goals of the central bank. (JEL E12, E23, E31, E52, E58, E62 ) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

Monetary Commitment and Fiscal Discretion: The Optimal Policy Mix

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Publisher
American Economic Association
Copyright
Copyright © 2013 by the American Economic Association
Subject
Articles
ISSN
1945-7715
eISSN
1945-7715
DOI
10.1257/mac.5.2.187
Publisher site
See Article on Publisher Site

Abstract

Abstract We study a noncooperative policy game between monetary and fiscal policy, where only monetary policy can commit to future actions. The equilibrium outcome of the game depends on the strategies available to the monetary policymaker. If strategies are left unrestricted, the central bank can alter the incentives of the fiscal authority in a way that replicates the full commitment solution. If the central bank cannot commit to respond to fiscal policy, the fiscal authority generates fluctuations in government expenditure that undermine the stabilization goals of the central bank. (JEL E12, E23, E31, E52, E58, E62 )

Journal

American Economic Journal: MacroeconomicsAmerican Economic Association

Published: Apr 1, 2013

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