Working Paper: CEPR ID: DP12903
Authors: Jean Barthelemy; Guillaume Plantin
Abstract: This paper develops a full-fledged strategic analysis of Wallace’s “game of chicken”. A public sector facing legacy nominal liabilities is comprised of fiscal and monetary authorities that respectively set the primary surplus and the price level in a non-cooperative fashion. We find that the post 2008 feature of indefinitely postponed fiscal consolidation and rapid expansion of the Federal Reserve’s balance sheet is consistent with a strategic setting in which neither authority can commit to a policy beyond its current mandate, and the fiscal authority has more bargaining power than the monetary one at each date.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal Authority (E62) | Monetary Authority (E42) |
| Fiscal Decisions (E62) | Monetary Outcomes (E49) |
| Fiscal Authority Moves First (E62) | Monetary Authority Inflates Debt Away (E31) |
| Convex Default Costs (D43) | Strategic Dynamic Between Authorities (D74) |
| One Authority's Accommodation (Y20) | Other Authority's Tougher Stance (Z28) |