CENTRAL BANK INDEPENDENCE AND THE MONETARY INSTRUMENT PROBLEM

Paul Pichler · Gerhard Sorger

25 citations0/0 files storedInternational Economic Review

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Monetary Policy and Economic Impact Fiscal Policies and Political Economy Economic theories and models

Abstract

We study the monetary instrument problem in a dynamic noncooperative game between separate, discretionary, fiscal and monetary policy makers. We show that monetary instruments are equivalent only if the policy makers' objectives are perfectly aligned; otherwise an instrument problem exists. When the central bank is benevolent while the fiscal authority is short‐sighted relative to the private sector, excessive public spending and debt emerge under a money growth policy but not under an interest rate policy. Despite this property, the interest rate is not necessarily the optimal instrument.

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1985The Optimal Degree of Commitment to an Intermediate Monetary Target 1975"Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule 1991Equilibria under ‘active’ and ‘passive’ monetary and fiscal policies 1983Optimal fiscal and monetary policy in an economy without capital 1970Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model 2003Optimal fiscal and monetary policy under sticky prices 1992Projection methods for solving aggregate growth models 2001Monetary Policy and Multiple Equilibria

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2019Discretionary monetary policy in the Calvo model 2013Debt, Inflation and Central Bank Independence 2010Optimal fiscal and monetary policies in the face of rare disasters 2015Ups and Downs. Central Bank Independence from the Great Inflation to the Great Recession: Theory, Institutions and Empirics

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