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Government Leadership and Central Bank Design

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  • Hughes Hallett, Andrew
  • Weymark, Diana

Abstract

This article investigates the impact on economic performance of the timing of moves in a policy game between the government and the central bank for a government with both distributional and stabilization objectives. It is shown that both inflation and income inequality are reduced without sacrificing output growth if the government assumes a leadership role compared to a regime in which monetary and fiscal policy is determined simultaneously. Further, it is shown that government leadership benefits both the fiscal and monetary authorities. The implications of these results for a country deciding whether to join a monetary union are also considered.

Suggested Citation

  • Hughes Hallett, Andrew & Weymark, Diana, 2002. "Government Leadership and Central Bank Design," CEPR Discussion Papers 3395, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:3395
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    References listed on IDEAS

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    1. Dave Turner & Elena Seghezza, 1999. "Testing for a Common OECD Phillips Curve," OECD Economics Department Working Papers 219, OECD Publishing.
    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, 1981. "Output Effects of Government Purchases," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1086-1121, December.
    4. Charles Nolan, 2002. "Monetary Stabilisation Policy in a Monetary Union: Some Simple Analytics," Scottish Journal of Political Economy, Scottish Economic Society, vol. 49(2), pages 196-215, May.
    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. Hallett Andrew Hughes & Weymark Diana N., 2005. "Independence Before Conservatism: Transparency, Politics and Central Bank Design," German Economic Review, De Gruyter, vol. 6(1), pages 1-21, February.
    7. Hughes Hallett, Andrew & Weymark, Diana N., 2004. "Independent monetary policies and social equity," Economics Letters, Elsevier, vol. 85(1), pages 103-110, October.
    8. A.J. Hallet, 1998. "When Do Target Zones Work? An Examination of Exchange Rate Targeting as a Device for Coordinating Economic Policies," Open Economies Review, Springer, vol. 9(2), pages 115-138, April.
    9. Andrew Hallett & Nicola Viegi, 2002. "Inflation Targeting as a Coordination Device," Open Economies Review, Springer, vol. 13(4), pages 341-362, October.
    10. Andrew Hughes Hallett & Diana N. Weymark, 2002. "Policy Games and the Optimal Design of Central Banks," Vanderbilt University Department of Economics Working Papers 0220, Vanderbilt University Department of Economics.
    11. Fischer, Stanley, 1995. "Central-Bank Independence Revisited," American Economic Review, American Economic Association, vol. 85(2), pages 201-206, May.
    12. Diana N. Weymark, 2001. "Inflation, Income Redistribution, and Optimal Central Bank Independence," Vanderbilt University Department of Economics Working Papers 0102, Vanderbilt University Department of Economics.
    13. Andrew Hughes Hallett & Diana N. Weymark, 2001. "The Cost of Heterogeneity in a Monetary Union," Vanderbilt University Department of Economics Working Papers 0128, Vanderbilt University Department of Economics.
    14. repec:bla:intfin:v:3:y:2000:i:3:p:439-69 is not listed on IDEAS
    15. Gilles Oudiz & Jeffrey Sachs, 1984. "Macroeconomic Policy Coordination among the Industrial Economies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(1), pages 1-76.
    16. Georg Rich, 2000. "Monetary Policy Without Central Bank Money: A Swiss Perspective," International Finance, Wiley Blackwell, vol. 3(3), pages 439-469, November.
    17. David Currie & Paul Levine, 1985. "Macroeconomic Policy Design in an Interdependent World," NBER Chapters, in: International Economic Policy Coordination, pages 228-273, National Bureau of Economic Research, Inc.
    18. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    19. Currie, David & Holtham, Gerald & Hughes, Gordon, 1989. "The Theory and Practice of International Policy Coordination: Does Coordination Pay?," CEPR Discussion Papers 325, C.E.P.R. Discussion Papers.
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    Citations

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    Cited by:

    1. Giuseppe Ciccarone & Enrico Marchetti & Giovanni Di Bartolomeo, 2007. "Unions, Fiscal Policy And Central Bank Transparency," Manchester School, University of Manchester, vol. 75(5), pages 617-633, September.
    2. Weymark, Diana N., 2007. "Inflation, government transfers, and optimal central bank independence," European Economic Review, Elsevier, vol. 51(2), pages 297-315, February.
    3. Hughes Hallett, Andrew, 2005. "In Praise of Fiscal Restraint and Debt Rules. What the Euro Zone Might Do Now," CEPR Discussion Papers 5043, C.E.P.R. Discussion Papers.
    4. Andrew Hughes Hallett, 2004. "Post-Thatcher Fiscal Strategies in the U.K.: An Interpretation," CESifo Working Paper Series 1372, CESifo.
    5. Ullrich, Katrin, 2003. "Unabhängigkeit und Verantwortlichkeit der Europäischen Zentralbank," ZEW Discussion Papers 03-65, ZEW - Leibniz Centre for European Economic Research.

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    More about this item

    Keywords

    Central bank independence; Monetary policy delegation; Policy coordination; Policy game; Policy leadership;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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