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American Economic Journal: Macroeconomics: Vol. 5 No. 2 (April 2013)

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Monetary Commitment and Fiscal Discretion: The Optimal Policy Mix

Article 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

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)

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Authors

Gnocchi, Stefano (Autonomous U Barcelona and Barcelona GSE)

JEL Classifications

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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American Economic Journal: Macroeconomics


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