DP3395 Government Leadership and Central Bank Design
|Author(s):||Andrew Hughes Hallett, Diana Weymark|
|Publication Date:||May 2002|
|Keyword(s):||central bank independence, monetary policy delegation, policy coordination, policy game, policy leadership|
|JEL(s):||E52, E61, F42|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=3395|
This article investigates the impact on economic performance of the timing of moves in a policy game between the government and the central bank for a government with both distributional and stabilization objectives. It is shown that both inflation and income inequality are reduced without sacrificing output growth if the government assumes a leadership role compared to a regime in which monetary and fiscal policy is determined simultaneously. Further, it is shown that government leadership benefits both the fiscal and monetary authorities. The implications of these results for a country deciding whether to join a monetary union are also considered.