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CENTRAL BANK INDEPENDENCE AND THE MONETARY INSTRUMENT PROBLEM
Author(s) -
NIEMANN STEFAN,
PICHLER PAUL,
SORGER GERHARD
Publication year - 2013
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12027
Subject(s) - monetary policy , economics , interest rate , debt , monetary economics , forward guidance , independence (probability theory) , central bank , credit channel , dynamic inconsistency , fiscal policy , quantitative easing , inflation targeting , macroeconomics , microeconomics , statistics , mathematics
We study the monetary instrument problem in a dynamic noncooperative game between separate, discretionary, fiscal and monetary policy makers. We show that monetary instruments are equivalent only if the policy makers' objectives are perfectly aligned; otherwise an instrument problem exists. When the central bank is benevolent while the fiscal authority is short‐sighted relative to the private sector, excessive public spending and debt emerge under a money growth policy but not under an interest rate policy. Despite this property, the interest rate is not necessarily the optimal instrument.