One objection to delegating monetary policy to an independent central bank is that it causes lack of coordination with fiscal policy. Nordhaus has recently shown, in a simple game-theoretic model, how this generates too-contractionary monetary policy and too-expansionary fiscal policy, with interest rates becoming excessively high. In this note we incorporate the time-consistency, inflation- bias problem into the analysis, since it is this that has motivated most proposals for granting independence. We show that when the inflation-suppressing benefits are modeled alongside the high-interest rate costs, delegation may still be, on balance, against society's interests. Copyright 1998 by Taylor and Francis Group
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Volume (Year): 12 (1998) Issue (Month): 3 (September) Pages: 415-22 Download reference. The following formats are available: HTML
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