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Do we really need to tame a conservative ECB? When the policy mix matters

Author

Listed:
  • Marco Lossani

    (Catholic University of Milan-Bicocca)

  • Piergiovanna Natale

    (Department of Economics, University of Milan-Bicocca)

  • Patrizio Tirelli

    (Department of Economics, University of Milan-Bicocca)

Abstract

This paper contributes to the goal-versus-instrument independence debate for the ECB exploring how these alternative monetary arrangements perform when the fiscal authority pursues a strategy of debt reduction in the long term but retains fiscal flexibility in response to supply shocks. If fiscal policy is sufficiently flexible, appointing a goal independent (i.e. conservative) central banker dominates inflation targeting. In fact, as the fiscal authority and the central bank act independently in setting their countercyclical policies, an activist central banker causes excess volatility of inflation. This result provides theoretical content to the claim that a strong and goal-independent ECB needs a political match able to engineer countercyclical fiscal policies.

Suggested Citation

  • Marco Lossani & Piergiovanna Natale & Patrizio Tirelli, 1997. "Do we really need to tame a conservative ECB? When the policy mix matters," Working Papers 18, University of Milano-Bicocca, Department of Economics, revised Nov 1998.
    • Handle: RePEc:mib:wpaper:18
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    File URL: http://repec.dems.unimib.it/repec/pdf/mibwpaper18.pdf
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    References listed on IDEAS

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    Cited by:

    1. Marco Lossani & Piergiovanna Natale & Patrizio Tirelli, 2001. "Fiscal Policy and Inflation Targets: Does Credibility Matter?," Economia politica, Società editrice il Mulino, issue 3, pages 371-392.

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