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Fiscal Policy and the Implementation of the Walsh Contract for Central Bankers

Author

Listed:
  • Haizhou Huang

    (International Monetary Fund)

  • A. Jorge Padilla

    (CEMFI)

Abstract

We develop a simple macroeconomic model where the time inconsistency of optimal monetary policy is due to tax distortions. If fiscal policy is exogenously fixed at its optimal level, a Walsh contract (Walsh, 1995) offered to an independent central bank implements the optimal monetary policy. When fiscal policy is determined endogenously, however, this contract is subject to strategic manipulation by the government, which results in a suboptimal policy mix. Implementing the optimal policy mix requires either that the central bank enjoy primacy over the fiscal authority or that fiscal policy be also delegated to an independent authority.

Suggested Citation

  • Haizhou Huang & A. Jorge Padilla, 2002. "Fiscal Policy and the Implementation of the Walsh Contract for Central Bankers," Annals of Economics and Finance, Society for AEF, vol. 3(1), pages 27-42, May.
    • Handle: RePEc:cuf:journl:y:2002:v:3:i:1:p:27-42
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    References listed on IDEAS

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    Cited by:

    1. Huang, Haizhou & Wei, Shang-Jin, 2006. "Monetary policies for developing countries: The role of institutional quality," Journal of International Economics, Elsevier, vol. 70(1), pages 239-252, September.
    2. Denis Nitikin & Chunli Shen & Qian Wang & Heng-fu Zou, 2012. "Water Service Delivery Reform in China: Safeguarding the Interests of the Poor," Annals of Economics and Finance, Society for AEF, vol. 13(2), pages 463-487, November.
    3. Haizhou Huang & Shang-Jin Wei, 2003. "Monetary Policies for Developing Countries: The Role of Corruption," NBER Working Papers 10093, National Bureau of Economic Research, Inc.
    4. Sylvia Uchenna Agu & Ifeoma Mary Okwo & Okelue David Ugwunta & Adeline Idike, 2015. "Fiscal Policy and Economic Growth in Nigeria," SAGE Open, , vol. 5(4), pages 21582440156, November.
    5. Anyalechi Kenneth Chikezie & Onwumere Uchechukwu Joe & Boloupremo Tarila, 2017. "Fiscal Policy and the Nigerian Economy: An Econometric Review," International Journal of Business and Management, Canadian Center of Science and Education, vol. 12(4), pages 186-186, March.
    6. Denis Nitikin & Chunli Shen & Qian Wang & Heng-fu Zou, 2011. "Land Taxation in China: Assessment of Prospects for Politically and Economically Sustainable Reform," CEMA Working Papers 431, China Economics and Management Academy, Central University of Finance and Economics.
    7. Heng-fu Zou, 2011. "Foreign Asset Accumulation and Macroeconomic Policies in a Model of Mercantilism," CEMA Working Papers 432, China Economics and Management Academy, Central University of Finance and Economics.
    8. COMBEY, Adama & NUBUKPO, Kako, 2013. "Coordination des Politiques Economiques au Sein de la Zone UEMOA : Bilan et Perspectives [Economic Policy Coordination in the WAEMU: Results and Prospects]," MPRA Paper 58118, University Library of Munich, Germany, revised Aug 2014.

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    More about this item

    Keywords

    Central banking; Optimal contracts; Monetary and fiscal policy; Strategic manipulation; Nash implementation;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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