Central Bank Independence and the Design of Fiscal Institutions

38 Pages Posted: 14 Feb 2006

See all articles by Francesca Castellani

Francesca Castellani

Graduate Institute of International Studies (HEI)

Xavier Debrun

International Monetary Fund (IMF) - Research Department

Date Written: December 2001

Abstract

We study the desirability of reforming fiscal institutions along with the delegation of monetary policy to an independent central bank. The model provides a rationale for discipline-enhancing fiscal institutions and highlights some of their desirable features. Three main results emerge. First, when the government can pre-commit on fiscal strategies, fiscal discretion is optimal only if the central bank strictly targets the socially optimal inflation rate. Second, without pre-commitment technology, fiscal restraints are desirable and contingent on the strategic interaction between monetary and fiscal authorities. Third, deficit rules are generally inefficient, and instrument-specific rules based on a combination of linear and quadratic contracts with targets are called for.

Keywords: central bank independence, policy mix, fiscal rules, linear and quadratic contracts with targets

JEL Classification: E52, E61, E62

Suggested Citation

Castellani, Francesca and Debrun, Xavier, Central Bank Independence and the Design of Fiscal Institutions (December 2001). IMF Working Paper No. 01/205, Available at SSRN: https://ssrn.com/abstract=880855

Francesca Castellani (Contact Author)

Graduate Institute of International Studies (HEI) ( email )

PO Box 136
Geneva, CH-1211
Switzerland

Xavier Debrun

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8321 (Phone)
202-623-6343 (Fax)

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

Paper statistics

Downloads
80
Abstract Views
588
rank
411,502
PlumX Metrics