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Can Conservatism Be Counterproductive? Delegation and Fiscal Policy in a Monetary Union
Author(s) -
Pina Álvaro Manuel
Publication year - 1999
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/1467-9957.67.s1.5
Subject(s) - delegation , economics , conservatism , independence (probability theory) , externality , inflation (cosmology) , fiscal policy , monetary economics , fiscal union , shock (circulatory) , monetary policy , fiscal imbalance , macroeconomics , microeconomics , political science , medicine , statistics , physics , mathematics , management , politics , theoretical physics , law
This paper studies central bank independence in a model of a monetary union where fiscal policies remain the responsibility of national governments and generate externalities. Governments may either coordinate fiscal policy or not, and three forms of delegation are considered: Rogoff‐type ‘weight independence’, inflation targets and linear inflation contracts. The key results are as follows. Under fiscal coordination, ‘conservatism’ holds and targets (or contracts) outperform ‘weight independence’. Without fiscal coordination, ‘anti‐conservatism’ may be optimal when fiscal spillovers are negative, as it reduces governments’ activism; and ‘weight independence’ is restored, since it can alleviate distortions in shock stabilization.