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  4. April 2013
  5. Monetary Commitment and Fiscal Discretion: The Optimal Policy Mix

American Economic Journal:
Macroeconomics

ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)

Monetary Commitment and Fiscal Discretion: The Optimal Policy Mix

  • Stefano Gnocchi
American Economic Journal: Macroeconomics
vol. 5, no. 2, April 2013
(pp. 187–216)
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Abstract

We study a noncooperative policy game between monetary and fiscal policy, where only monetary policy can commit to future actions. The equilibrium outcome of the game depends on the strategies available to the monetary policymaker. If strategies are left unrestricted, the central bank can alter the incentives of the fiscal authority in a way that replicates the full commitment solution. If the central bank cannot commit to respond to fiscal policy, the fiscal authority generates fluctuations in government expenditure that undermine the stabilization goals of the central bank. (JEL E12, E23, E31, E52, E58, E62)

Citation

Gnocchi, Stefano. 2013. "Monetary Commitment and Fiscal Discretion: The Optimal Policy Mix." American Economic Journal: Macroeconomics, 5 (2): 187–216. DOI: 10.1257/mac.5.2.187

Additional Materials

JEL Classification

  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian
  • E23 Macroeconomics: Production
  • E31 Price Level; Inflation; Deflation
  • E52 Monetary Policy
  • E58 Central Banks and Their Policies
  • E62 Fiscal Policy
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