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.