Fiscal Discretion Destroys Monetary Commitment

29 Pages Posted: 13 Jul 2000

See all articles by Avinash Dixit

Avinash Dixit

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

Luisa Lambertini

Ecole Polytechnique Fédérale de Lausanne

Date Written: June 2, 2000

Abstract

We consider the interaction between monetary and fiscal policies, in one country and in a monetary union. In a Nash equilibrium, at least one of the outcomes (output and inflation) are more extreme than the ideal points of both policy authorities. We allow very general stochastic shocks to the parameters, and find the fully optimal monetary policy rule as a nonlinear function of these shocks. We find that the rule does no better than discretionary leadership of monetary policy in every realization of the shocks.

JEL Classification: F30, F33, E52

Suggested Citation

Dixit, Avinash K. and Lambertini, Luisa, Fiscal Discretion Destroys Monetary Commitment (June 2, 2000). Available at SSRN: https://ssrn.com/abstract=232654 or http://dx.doi.org/10.2139/ssrn.232654

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

Luisa Lambertini (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Odyssea
Station 5
Lausanne, 1015
Switzerland

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