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The Big Picture of Monetary–Fiscal Interactions *
Author(s) -
Franta Michal,
Libich Jan,
Stehlík Petr
Publication year - 2011
Publication title -
economic papers: a journal of applied economics and policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.245
H-Index - 19
eISSN - 1759-3441
pISSN - 0812-0439
DOI - 10.1111/j.1759-3441.2011.00105.x
Subject(s) - economics , monetary policy , inflation (cosmology) , fiscal policy , monetary economics , macroeconomics , fiscal union , schematic , ammunition , physics , archaeology , electronic engineering , theoretical physics , history , engineering
The paper offers a schematic game theoretic approach to thinking about medium‐term strategic interactions between monetary and fiscal policy. We show that under some circumstances fiscal excesses may spill over to monetary policy, but a legislated commitment to a numerical inflation target can sometimes prevent this through providing the central bank with ammunition to counter‐act excessive fiscal actions. As such, a more explicit monetary commitment may have a ‘disciplining effect’ on fiscal policy, and improve fiscal outcomes as well as monetary outcomes. We present some empirical evidence for this finding.