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    Monetary and fiscal policy interactions: the role of the quality of institutions in a dynamic environment

    Dimakou, Ourania (2006) Monetary and fiscal policy interactions: the role of the quality of institutions in a dynamic environment. Working Paper. Birkbeck, University of London, London, UK.

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    This paper analyses the interaction between fiscal and monetary policy using the original Barro and Gordon (1983) model extended to include fiscal policy, dynamics and the level of institutional quality, measured as bureaucratic corruption. It is found that delegating monetary policy to an independent central bank (i.e. not fiscally dominated) the second best solution of the model is achievable only if there is no bureaucratic corruption. Otherwise, when institutional quality is not optimal, unless a less conservative than the government, regarding output considerations, independent central bank is delegated, the second best is not restored. The government has the incentive to increase debt strategically in an attempt to increase second period inflation. This result is augmented by the quality of institutions and poses difficulties on the achievement of both price stability and a balanced debt process. Quality of institutions, hence, can provide an explanation for the poorer inflation performance, due to debt boosts, of countries with lower institutional quality despite the introduction of central bank independence.


    Item Type: Monograph (Working Paper)
    Additional Information: BWPEF 0607
    Keyword(s) / Subject(s): Monetary and Fiscal policy, time-inconsistency, independent central bank, corruption
    School: Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School
    Depositing User: Administrator
    Date Deposited: 28 Mar 2019 07:05
    Last Modified: 04 Jul 2024 05:54


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