Inflation Conservatism and Monetary-Fiscal Policy Interactions

32 Pages Posted: 29 Jan 2008 Last revised: 28 Apr 2010

See all articles by Andrew P. Blake

Andrew P. Blake

Bank of England - CCBS

Tatiana Kirsanova

University of Glasgow - Adam Smith Business School

Date Written: August 27, 2009

Abstract

This paper investigates the stabilization bias that arises in a model of monetary and fiscal policy stabilization of the economy, when assuming that the monetary authority put higher weight on inflation stabilization than society. We demonstrate that inflation-conservatism unambiguously leads to social welfare losses if the fiscal authority acts strategically. Although the precise form of monetary-fiscal interactions depends on the choice of fiscal instrument and on the level of steady state debt, the assessment of gains is robust to these assumptions. We also study how the outcome of stabilization depends on the leadership structure. We develop an algorithm that computes leadership equilibria in much wider spectrum of problems with strategic agents in LQ RE models.

Keywords: Monetary and Fiscal Policy, Policy Delegation, Discretion, Leadership Equilibria

JEL Classification: E31, E52, E58, E61, C61

Suggested Citation

Blake, Andrew P. and Kirsanova, Tatiana, Inflation Conservatism and Monetary-Fiscal Policy Interactions (August 27, 2009). Available at SSRN: https://ssrn.com/abstract=1087962 or http://dx.doi.org/10.2139/ssrn.1087962

Andrew P. Blake

Bank of England - CCBS ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Tatiana Kirsanova (Contact Author)

University of Glasgow - Adam Smith Business School ( email )

Glasgow, Scotland
United Kingdom

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