Fiscal Discretion Destroys Monetary Commitment
29 Pages Posted: 13 Jul 2000
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: Suggested Citation
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