IDEAS home Printed from https://ideas.repec.org/a/eee/jmacro/v75y2023ics0164070422000933.html
   My bibliography  Save this article

Monetary policy, fiscal policy and cross signal jamming

Author

Listed:
  • Kim, Jeong-Yoo
  • Choi, Hyung Sun

Abstract

This paper considers the issue of rule versus discretion when the central bank and the government share private information but have different preferences over inflation and output. We demonstrate that if the monetary policy is rule-based, Intuitive Criterion selects the unique separating equilibrium in which the central bank signals a low supply shock by a low interest rate. Interestingly, discretion may be better than the rule for the central bank, contrary to the case of complete information. Also, we examine the effect of information asymmetry on the monetary and fiscal policy mix. We show that cross signal jamming whereby the monetary authority and the fiscal authority successfully jams an unfavorable signal of each other does not occur in equilibrium.

Suggested Citation

  • Kim, Jeong-Yoo & Choi, Hyung Sun, 2023. "Monetary policy, fiscal policy and cross signal jamming," Journal of Macroeconomics, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:jmacro:v:75:y:2023:i:c:s0164070422000933
    DOI: 10.1016/j.jmacro.2022.103500
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0164070422000933
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jmacro.2022.103500?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Canzoneri, Matthew B, 1985. "Monetary Policy Games and the Role of Private Information," American Economic Review, American Economic Association, vol. 75(5), pages 1056-1070, December.
    2. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    3. Barro, Robert J., 1986. "Reputation in a model of monetary policy with incomplete information," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 3-20, January.
    4. Jeong-Yoo Kim, 2017. "Pricing an Experience Composite Good as Coordinated Signals," Manchester School, University of Manchester, vol. 85(2), pages 163-182, March.
    5. Dixit, Avinash & Lambertini, Luisa, 2001. "Monetary-fiscal policy interactions and commitment versus discretion in a monetary union," European Economic Review, Elsevier, vol. 45(4-6), pages 977-987, May.
    6. Adam, Klaus & Billi, Roberto M., 2008. "Monetary conservatism and fiscal policy," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1376-1388, November.
    7. Tatiana Kirsanova & Stephanus le Roux, 2013. "Commitment vs. Discretion in the UK: An Empirical Investigation of the Monetary and Fiscal Policy Regime," International Journal of Central Banking, International Journal of Central Banking, vol. 9(4), pages 99-152, December.
    8. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 179-221.
    9. Avinash Dixit & Luisa Lambertini, 2003. "Interactions of Commitment and Discretion in Monetary and Fiscal Policies," American Economic Review, American Economic Association, vol. 93(5), pages 1522-1542, December.
    10. Jeong-Yoo Kim & Joon Song, 2007. "Signal Jamming in Pretrial Negotiation with Multiple Defendants," Journal of Economics, Springer, vol. 91(2), pages 177-200, June.
    11. Pasquale Foresti, 2018. "Monetary And Fiscal Policies Interaction In Monetary Unions," Journal of Economic Surveys, Wiley Blackwell, vol. 32(1), pages 226-248, February.
    12. Joanna Stawska & Maciej Malaczewski & Agata Szymańska, 2019. "Combined monetary and fiscal policy: the Nash Equilibrium for the case of non-cooperative game," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 32(1), pages 3554-3569, January.
    13. Cui, Wei, 2016. "Monetary–fiscal interactions with endogenous liquidity frictions," European Economic Review, Elsevier, vol. 87(C), pages 1-25.
    14. Helton Saulo & Leandro Rêgo & Jose Divino, 2013. "Fiscal and monetary policy interactions: a game theory approach," Annals of Operations Research, Springer, vol. 206(1), pages 341-366, July.
    15. Gregory E. Givens, 2012. "Estimating Central Bank Preferences under Commitment and Discretion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(6), pages 1033-1061, September.
    16. Andolfatto, David & Martin, Fernando M., 2018. "Monetary policy and liquid government debt," Journal of Economic Dynamics and Control, Elsevier, vol. 89(C), pages 183-199.
    17. Vickers, John, 1986. "Signalling in a Model of Monetary Policy with Incomplete Information," Oxford Economic Papers, Oxford University Press, vol. 38(3), pages 443-455, November.
    18. Kydland, Finn, 1977. "Equilibrium solutions in dynamic dominant-player models," Journal of Economic Theory, Elsevier, vol. 15(2), pages 307-324, August.
    19. Stein, Jeremy C, 1989. "Cheap Talk and the Fed: A Theory of Imprecise Policy Announcements," American Economic Review, American Economic Association, vol. 79(1), pages 32-42, March.
    20. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    21. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    22. Kim Jeong-Yoo, 2003. "Signal Jamming in Games with Multiple Senders," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 3(1), pages 1-20, November.
    23. Adam, Klaus & Billi, Roberto M., 2008. "Monetary conservatism and fiscal policy," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1376-1388, November.
    24. Williamson, Stephen D., 2018. "Can the fiscal authority constrain the central bank?," Journal of Economic Dynamics and Control, Elsevier, vol. 89(C), pages 154-172.
    25. Liu, Ding & Zhang, Yue & Sun, Weihong, 2020. "Commitment or discretion? An empirical investigation of monetary policy preferences in China," Economic Modelling, Elsevier, vol. 85(C), pages 409-419.
    26. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
    27. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 87(3), pages 355-374.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Persson, Torsten & Tabellini, Guido, 1999. "Political economics and macroeconomic policy," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 22, pages 1397-1482, Elsevier.
    2. Bugarin, Mauricio Soares & Carvalho, Fábia Aparecida de, 2020. "Elections, Heterogeneity of Central Bankers and Inflationary Pressure: The case for staggered terms for the president and the central banker," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 74(4), December.
    3. Mihailov, Alexander & Ullrich, Katrin, 2007. "Independence and Accountability of Monetary and Fiscal Policy Committees," ZEW Discussion Papers 07-044, ZEW - Leibniz Centre for European Economic Research.
    4. Martin, Fernando M., 2015. "Debt, inflation and central bank independence," European Economic Review, Elsevier, vol. 79(C), pages 129-150.
    5. Juan Ayuso Huertas, 1991. "Los efectos del anuncio de un objetivo de inflación," Investigaciones Economicas, Fundación SEPI, vol. 15(3), pages 627-644, September.
    6. Hubert Kempf & Leopold von Thadden, 2007. "On policy interactions among nations: when do cooperation and commitment matter ?," 2007 Meeting Papers 801, Society for Economic Dynamics.
    7. Ball, Laurence, 1995. "Time-consistent policy and persistent changes in inflation," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 329-350, November.
    8. Miller, David S., 2016. "Commitment versus discretion in a political economy model of fiscal and monetary policy interaction," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 17-29.
    9. Cowen, Tyler & Glazer, Amihai & Zajc, Katarina, 2000. "Credibility may require discretion, not rules," Journal of Public Economics, Elsevier, vol. 76(2), pages 295-306, May.
    10. R. Cellini & L. Lambertini, 2003. "On the Dynamic Consistency of Optimal Monetary Policy," Working Papers 463, Dipartimento Scienze Economiche, Universita' di Bologna.
    11. Demirel, Ufuk Devrim, 2012. "The value of monetary policy commitment under imperfect fiscal credibility," Journal of Economic Dynamics and Control, Elsevier, vol. 36(6), pages 813-829.
    12. Roberds, William, 1987. "Models of Policy under Stochastic Replanning," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 731-755, October.
    13. Alesina, Alberto & Stella, Andrea, 2010. "The Politics of Monetary Policy," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 18, pages 1001-1054, Elsevier.
    14. José I. Garcia de Paso, 1996. "A partisan model of political monetary cycles," Investigaciones Economicas, Fundación SEPI, vol. 20(2), pages 243-262, May.
    15. D. Masciandaro, 2019. "What Bird Is That? Central Banking And Monetary Policy In The Last Forty Years," BAFFI CAREFIN Working Papers 19127, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    16. Geraats, Petra Maria, 2001. "Precommitment, Transparency and Monetary Policy," Discussion Paper Series 1: Economic Studies 2001,12, Deutsche Bundesbank.
    17. Pasquale Foresti, 2018. "Monetary And Fiscal Policies Interaction In Monetary Unions," Journal of Economic Surveys, Wiley Blackwell, vol. 32(1), pages 226-248, February.
    18. Robert G. King & Yang K. Lu & Ernesto S. Pastén, 2008. "Managing Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1625-1666, December.
    19. L. Bini-Smaghi, 1998. "The democratic accountability of the European Central Bank," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 51(205), pages 119-143.
    20. Bohn, Frank, 2013. "Grand corruption instead of commitment? Reconsidering time-inconsistency of monetary policy," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 478-490.

    More about this item

    Keywords

    Monetary policy; Fiscal policy; Signal; Cross signal jamming; Commitment; Time-inconsistency;
    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jmacro:v:75:y:2023:i:c:s0164070422000933. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622617 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.