DP12903 Fiscal and Monetary Regimes: A Strategic Approach
|Author(s):||Jean Barthelemy, Guillaume Plantin|
|Publication Date:||May 2018|
|Programme Areas:||Monetary Economics and Fluctuations|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=12903|
This paper develops a full-fledged strategic analysis of Wallace's "game of chicken". A public sector facing legacy nominal liabilities is comprised of fiscal and monetary authorities that respectively set the primary surplus and the price level in a non-cooperative fashion. We find that the post 2008 feature of indefinitely postponed fiscal consolidation and rapid expansion of the Federal Reserve's balance sheet is consistent with a strategic setting in which neither authority can commit to a policy beyond its current mandate, and the fiscal authority has more bargaining power than the monetary one at each date.