Inflation Targeting and Fiscal Rules: Do Interactions and Sequencing Matter?

Abstract

The paper examines the joint impact of inflation targeting (IT) and fiscal rules (FR) on fiscal behavior and inflation in a broad panel of advanced and developing economies over the period 1990-2009. The main contribution of the paper is to show that, as suggested by the theoretical literature, interactions between FR and IT matter a great deal for policy outcomes. Specifically, the combination of FR and IT appears to deliver more disciplined macroeconomic policies than each of these institutions in isolation. In addition, the sequencing of the monetary and fiscal reforms plays a role: adopting FR before IT delivers stronger results than the reverse sequence.

Keywords: Inflation targeting, Fiscal rules, Fiscal policy, Macroprudential Policy, Monetary policy, Economic models, institutional reform sequencing., inflation, inflation rate, terms of trade, independent central bank, inflation target, monetary economics, price stability, inflation dynamics, price level, monetary institutions, fiscal behavior, inflation tax, fiscal authorities, fiscal authority, fiscal balances, lower inflation, average inflation, rate of inflation, inflation rates, inflation aversion, low inflation, inflation data, fiscal performances, inflation forecasts, fiscal reforms, fiscal policy rules, real value, government budget, fiscal balance, fiscal theory, fiscal institutions, excess

JEL Classification: E52, E58, E63, H62