Interactions of Commitment and Discretion in Monetary and Fiscal Policies

28 Pages Posted: 7 Aug 2009 Last revised: 9 Nov 2010

See all articles by Luisa Lambertini

Luisa Lambertini

Ecole Polytechnique Fédérale de Lausanne

Avinash Dixit

Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: 2003

Abstract

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.

Keywords: E61, E63

JEL Classification: monetary policy, fiscal policy

Suggested Citation

Lambertini, Luisa and Dixit, Avinash K., Interactions of Commitment and Discretion in Monetary and Fiscal Policies (2003). American Economic Review, Vol. 93, No. 5, 2003. Available at SSRN: https://ssrn.com/abstract=1444288

Luisa Lambertini (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Odyssea
Station 5
Lausanne, 1015
Switzerland

Avinash K. Dixit

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States
609-258-4000 (Phone)
609-258-6419 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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