Citation

Discussion Paper Details

Please find the details for DP7741 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Distortionary fiscal policy and monetary policy goals

Author(s): Klaus Adam and Roberto M Billi

Publication Date: March 2010

Keyword(s): discretion, Nash and Stackelberg equilibria, policy biases and sequential non-cooperative policy games

Programme Area(s): International Macroeconomics

Abstract: We study interactions between monetary policy, which sets nominal interest rates, and fiscal policy, which levies distortionary income taxes to finance public goods, in a standard, sticky-price economy with monopolistic competition. Policymakers' inability to commit in advance to future policies gives rise to excessive inflation and excessive public spending, resulting in welfare losses equivalent to several percent of consumption each period. We show how appointing a conservative monetary authority, which dislikes inflation more than society does, can considerably reduce these welfare losse and that optimally the monetary authority is predominatly concerned about inflation. Full conservatism, i.e., exclusive concern about inflation, entirely eliminates the welfare losses from discretionary monetary and fiscal policymaking, provided monetary policy is determined after fiscal policy each period. Full conservatism, however, is severely suboptimal when monetary policy is determined simultaneously with fiscal policy or before fiscal policy each period.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7741

Bibliographic Reference

Adam, K and Billi, R. 2010. 'Distortionary fiscal policy and monetary policy goals'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7741