Fiscal leadership and central bank design

• Published in: The Canadian journal of economics Vol. 40; no. 2; pp. 607 - 627
• Main Authors: Hallett, Andrew Hughes, Weymark, Diana N.
• Format: Journal Article
• Language: English
• Published: Malden, USA Blackwell Publishing Inc 01-05-2007; Blackwell Publishing; Blackwell Publishing Ltd
• Subjects: Central bank independence; Central banks; Conservatism; Coordination; E52; E61; Economic impact; Economic models; Economic policy; F42; Fiscal policy; Games of strategy; Government; Government officials; Government policy; Income inequality; Inflation; Monetary policy; Output rate; Political economy; Studies
• ISSN: 0008-4085; 1540-5982
• DOI: 10.1111/j.1365-2966.2007.00423.x

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 that has both redistributional 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 with a regime in which monetary and fiscal policy are determined simultaneously. Further, it is shown that government leadership benefits both the fiscal and monetary authorities through the enhanced coordination that this arrangement implies.