Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 278: Distortionary Fiscal Policy and Monetary Policy Goals

Klaus Adam () and Roberto M. Billi ()
Additional contact information
Klaus Adam: Mannheim University, Postal: Germany and CEPR, United Kingdom
Roberto M. Billi: Monetary Policy Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Abstract: We reconsider the role of an inflation conservative central banker in a setting with distortionary taxation. To do so, we assume monetary and fiscal policy are decided by independent authorities that do not abide to past commitments. If the two authorities make policy decisions simultaneously, inflation conservatism causes fiscal overspending. But if fiscal policy is determined before monetary policy, inflation conservatism imposes fiscal discipline. These results clarify that in our setting the value of inflation conservatism depends crucially on the timing of policy decisions.

Keywords: optimal policy; lack of commitment; conservative monetary policy

JEL-codes: E52; E62; E63

24 pages, October 1, 2013

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