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Costs of Separating Budgetary Policy from Control of Inflation: A Neglected Aspect of Central Bank Independence

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  • Blake, Andrew P
  • Weale, Martin

Abstract

The authors investigate the importance of coordinating monetary and fiscal policy in a fully dynamic model. The monetary authority seeks to control inflation while the fiscal authority has a budgetary target. They investigate the resulting Nash equilibrium and the consequences of a period of learning which may arise if each authority is not ex ante sure of the responses of the other. Both of these impact considerably on the outcome and indicate that there may be considerable costs to separating monetary and fiscal policy. Copyright 1998 by Royal Economic Society.

Suggested Citation

  • Blake, Andrew P & Weale, Martin, 1998. "Costs of Separating Budgetary Policy from Control of Inflation: A Neglected Aspect of Central Bank Independence," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 449-467, July.
    • Handle: RePEc:oup:oxecpp:v:50:y:1998:i:3:p:449-67
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    Cited by:

    1. Keshab Raj Bhattarai, 2016. "Economic Growth and Development in India and SAARC Countries," EcoMod2016 9631, EcoMod.
    2. repec:spo:wpmain:info:hdl:2441/2943 is not listed on IDEAS
    3. repec:hal:spmain:info:hdl:2441/2943 is not listed on IDEAS
    4. Jérôme Creel, 2002. "Strategic interactions between monetary and fiscal policies: a case study for the European Stability Pact," Post-Print hal-00972776, HAL.
    5. Hossein Samiei & Mr. Jan Kees Martijn, 1999. "Central Bank Independence and the Conduct of Monetary Policy in the United Kingdom," IMF Working Papers 1999/170, International Monetary Fund.
    6. Vines, David & Kirsanova, Tatiana & Stehn, Sven Jari, 2006. "Five-Equation Macroeconomics: A Simple View of the Interactions Between Fiscal Policy and Monetary Policy," CEPR Discussion Papers 5464, C.E.P.R. Discussion Papers.
    7. repec:spo:wpmain:info:hdl:2441/3221 is not listed on IDEAS
    8. repec:hal:spmain:info:hdl:2441/3221 is not listed on IDEAS
    9. Jérôme Creel, 2001. "Faut-il contraindre la politique budgétaire en Union monétaire ?. Les enseignements d'une maquette simulée," Revue de l'OFCE, Presses de Sciences-Po, vol. 77(2), pages 199-249.
    10. Libich, Jan & Nguyen, Dat Thanh & Stehlík, Petr, 2015. "Monetary exit and fiscal spillovers," European Journal of Political Economy, Elsevier, vol. 40(PA), pages 184-206.
    11. repec:dau:papers:123456789/3413 is not listed on IDEAS
    12. Jan Libich & Dat Thanh Nguyen & Petr Stehlík, 2011. "Monetary Exit Strategy and Fiscal Spillovers," CAMA Working Papers 2011-04, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    13. repec:hal:wpspec:info:hdl:2441/3221 is not listed on IDEAS
    14. repec:hal:wpspec:info:hdl:2441/2943 is not listed on IDEAS
    15. Jan Libich & Petr Stehlík, 2012. "Monetary Policy Facing Fiscal Indiscipline under Generalized Timing of Actions," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 168(3), pages 393-431, September.
    16. repec:spo:wpecon:info:hdl:2441/3221 is not listed on IDEAS
    17. repec:spo:wpecon:info:hdl:2441/2943 is not listed on IDEAS
    18. Dat Thanh Nguyen & Viet Anh Hoang, 2020. "Monetary Consequences of Fiscal Stress in a Game Theoretic Framework," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(special i), pages 125-164.

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