Distortionary Fiscal Policy and Monetary Policy Goals

Riksbank Research Paper Series No. 109

Sveriges Riksbank Working Paper Series No. 278

18 Pages Posted: 18 Dec 2013

See all articles by Klaus Adam

Klaus Adam

University of Mannheim; European Central Bank (ECB) - Department of Research; Centre for Economic Policy Research (CEPR)

Roberto M. Billi

Sveriges Riksbank

Multiple version iconThere are 2 versions of this paper

Date Written: October 2013

Abstract

We reconsider the role of an inflation conservative central banker in a setting with distortionary taxation. To do so, we assume monetary and fiscal policy are decided by independent authorities that do not abide to past commitments. If the two authorities make policy decisions simultaneously, inflation conservatism causes fiscal overspending. But if fiscal policy is determined before monetary policy, inflation conservatism imposes fiscal discipline. These results clarify that in our setting the value of inflation conservatism depends crucially on the timing of policy decisions.

Keywords: optimal policy, lack of commitment, conservative monetary policy

JEL Classification: E52, E62, E63

Suggested Citation

Adam, Klaus and Billi, Roberto M., Distortionary Fiscal Policy and Monetary Policy Goals (October 2013). Riksbank Research Paper Series No. 109, Sveriges Riksbank Working Paper Series No. 278 , Available at SSRN: https://ssrn.com/abstract=2350810 or http://dx.doi.org/10.2139/ssrn.2350810

Klaus Adam

University of Mannheim ( email )

Department of Economics
L7 ,3-5
Mannheim, 68131
Germany

HOME PAGE: http://adam.vwl.uni-mannheim.de/1528.0.html

European Central Bank (ECB) - Department of Research ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6597 (Phone)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Roberto M. Billi (Contact Author)

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

HOME PAGE: http://www.rmbilli.com

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