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The Central Bank Strikes Back! Credibility of Monetary Policy under Fiscal Influence

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  • Antoine Camous
  • Dmitry Matveev

Abstract

How should independent central banks react if pressured by fiscal policymakers? We contrast the implications of two monetary frameworks: one, where the central bank follows a standard rule aiming exclusively at price stability against the other, where monetary policy additionally leans against fiscal influence. The latter rule improves economic outcomes by providing appropriate incentives to the fiscal authority. More importantly, the additional fiscal conditionality can enhance the credibility of the central bank to achieve price stability. We emphasise how the level and structure of government debt emerge as key factors affecting the credibility of monetary policy with fiscal conditionality.

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  • Antoine Camous & Dmitry Matveev, 2023. "The Central Bank Strikes Back! Credibility of Monetary Policy under Fiscal Influence," The Economic Journal, Royal Economic Society, vol. 133(649), pages 1-29.
    • Handle: RePEc:oup:econjl:v:133:y:2023:i:649:p:1-29.
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    Cited by:

    1. Tatiana Kirsanova & Campbell Leith & Ding Liu, 2024. "Central Bank Independence, Government Debt and the Re-Normalization of Interest Rates," Working Papers 2024_10, Business School - Economics, University of Glasgow.
    2. Marco Bassetto & Thomas J. Sargent, 2020. "Shotgun Wedding: Fiscal and Monetary Policy," Annual Review of Economics, Annual Reviews, vol. 12(1), pages 659-690, August.
    3. Marco Bassetto & Gherardo Gennaro Caracciolo, 2021. "Monetary/Fiscal Interactions with Forty Budget Constraints," Working Papers 788, Federal Reserve Bank of Minneapolis.

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    More about this item

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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