Interactions of Commitment and Discretion in Monetary and Fiscal Policies
28 Pages Posted: 7 Aug 2009 Last revised: 9 Nov 2010
Date Written: 2003
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: Suggested Citation