Working Paper: CEPR ID: DP3395
Authors: Andrew Hughes Hallett; Diana Weymark
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.
Keywords: Central Bank Independence; Monetary Policy; Delegation; Policy Coordination; Policy Game; Policy Leadership
JEL Codes: E52; E61; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government leadership (H11) | Inflation (E31) |
| Government leadership (H11) | Income inequality (D31) |
| Government leadership (H11) | Output growth (O40) |
| Government leadership (H11) | Monetary policy effectiveness (E52) |
| Government leadership (H11) | Fiscal policy effectiveness (E62) |