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Central bank independence and the monetary instrument problem

Niemann, S and Pichler, P and Sorger, G (2013) 'Central bank independence and the monetary instrument problem.' International Economic Review, 54 (3). 1031 - 1055. ISSN 0020-6598

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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. © (2013) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Item Type: Article
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Jim Jamieson
Date Deposited: 04 Sep 2013 14:26
Last Modified: 17 Aug 2017 17:57

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