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Is Delegating Half of Demand Management Sensible?

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  • Neil Rankin

Abstract

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 modelled alongside the high-interests rate costs, delegation may still be, on balance, against society's interests.

Suggested Citation

  • Neil Rankin, 1998. "Is Delegating Half of Demand Management Sensible?," International Review of Applied Economics, Taylor & Francis Journals, vol. 12(3), pages 415-422.
    • Handle: RePEc:taf:irapec:v:12:y:1998:i:3:p:415-422
    DOI: 10.1080/02692179800000016
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    Cited by:

    1. repec:bla:jecsur:v:14:y:2000:i:5:p:527-61 is not listed on IDEAS
    2. Pusch, Toralf, 2007. "Verteilungskampf und geldpolitische Sanktion," Working Papers on Economic Governance 23, University of Hamburg, Department of Socioeconomics.
    3. Demertzis, Maria & Hughes Hallett, Andrew & Viegi, Nicola, 2004. "An independent central bank faced with elected governments," European Journal of Political Economy, Elsevier, vol. 20(4), pages 907-922, November.
    4. Pusch, Toralf & Heise, Arne, 2008. "Central Banks, Trade Unions and Reputation – Is there Room for an Expansionist Manoeuvre in the European Union?," MPRA Paper 19719, University Library of Munich, Germany.
    5. Maria Demertzis & Andrew Hughes Hallett & Nicola Viegi, 1999. "Can the ECB be Truly Independent? Should It Be?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 26(3), pages 217-240, September.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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