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Central Bank independence: Taylor rule and fiscal policy

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Abstract

In this article we will show that independence is not enough to impose a given inflation target when the Central Bank is following a Taylor rule, moreover in such a case, the fiscal authority will be able to set a different objective from the one sought by the monetary authority. On the other hand, if the fiscal authority is acting in accordance with a rule in which there is a estimated equilibrium expenditure G* similar to the estimated real interest rate r* in the Taylor rule, neither the government will be able to establish its inflation target value. In this sense, the type of rule that the economic authorities implement is essential for stabilization purposes. The different periods of implementation in fiscal and monetary policy are taken into account although they did not change the main conclusions.

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  • Luis Alberto Alonso González & Pilar García Martínez, 2004. "Central Bank independence: Taylor rule and fiscal policy," Documentos de trabajo de la Facultad de Ciencias Económicas y Empresariales 04-01, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
    • Handle: RePEc:ucm:doctra:04-01
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    Keywords

    Banco Central; Reglas de Taylor.;

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