Optimal Fiscal Stabilization Policy with Credible Central Bank Independence

13 Pages Posted: 21 Feb 2003

See all articles by Luca Lambertini

Luca Lambertini

University of Bologna - Department of Economics

Riccardo Rovelli

University of Bologna - Department of Economics; IZA Institute of Labor Economics

Date Written: December 21, 2002

Abstract

We study a model where monetary and fiscal policy share the task of stabilizing output and inflation, and the central bank has been assigned a mandate for the latter. The optimal fiscal policy does not imply assigning to the government a (symmetric) mandate to stabilize output. Instead, the optimal response to aggregate demand and supply shocks may be characterized as equivalent to an automatic stabilizer. An alternative but equivalent characterization of fiscal policy is that the government should maximize a "modified" social welfare function, respectively over (under) weighting the objective of price stability versus output stability when the relative size of aggregate demand vs. supply shocks is large (small). This over (under) weighting of the two objectives is only apparent, as it is in fact the logical consequence of having defined the mandate of the central bank in terms of one objective only.

Keywords: Stabilization policy, Monetary policy, Fiscal policy, Policy coordination

JEL Classification: E610, E630

Suggested Citation

Lambertini, Luca and Rovelli, Riccardo, Optimal Fiscal Stabilization Policy with Credible Central Bank Independence (December 21, 2002). Available at SSRN: https://ssrn.com/abstract=366000 or http://dx.doi.org/10.2139/ssrn.366000

Luca Lambertini

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy
+39 051 2092600 (Phone)
+39 051 2092664 (Fax)

Riccardo Rovelli (Contact Author)

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy
+39 051 2092 601 (Phone)
+39 051 6402 664 (Fax)

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
143
Abstract Views
2,140
rank
253,596
PlumX Metrics