Monetary conservatism and fiscal policy
By: By Klaus Adam and Roberto M. Billi.
Contributors: Billi, Roberto M. 1968-; Federal Reserve Bank of Kansas City. Research Division.
Series: RWP -- 07-01
Publisher: Research Division, Federal Reserve Bank of Kansas City
Published: 2007
Place of publication: Kansas City [Mo.]
Language: eng
Format: Electronic resource
Description: Does an inflation conservative central bank à la Rogoff (1985) remain desirable in a setting with endogenous fiscal policy? To provide an answer we study monetary and fiscal policy games without commitment in a dynamic stochastic sticky price economy with monopolistic distortions. Monetary policy determines nominal interest rates and fiscal policy provides public goods generating private utility. We find that lack of fiscal commitment gives rise to excessive public spending. The optimal inflation rate internalizing this distortion is positive, but lack of monetary commitment robustly generates too much inflation. A conservative monetary authority thus remains desirable. When fiscal policy is determined before monetary policy each period, the monetary authority should focus exclusively on stabilizing inflation, as this eliminates the steady state biases associated with lack of monetary and fiscal commitment. It also leads to stabilization policy that is close to if not fully optimal.
Notes: Title from PDF file (viewed on June 21, 2007).

"February 2007."

"First version: September 29, 2004."

Includes bibliographical references.

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