Interactions of Commitment and Discretion in Monetary and Fiscal Policies

Commitment Versus Discretion in Monetary Policy

*The views expressed here are those of the author and do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System. hether policymakers should commit to a certain course of action or have the flexibility to approach each situation as it arises continues to be a central question in the design of monetary policy. A seminal article written by two...

Monetary and Fiscal Interactions without Commitment and the Value of Monetary Conservatism∗

We study monetary and fiscal policy games in a dynamic sticky price economy where monetary policy sets nominal interest rates and fiscal policy provides public goods financed with distortionary labor taxes. We compare the Ramsey outcome to non-cooperative policy regimes where one or both policymakers lack commitment power. Absence of fiscal commitment gives rise to a public spending bias, while...

Optimal fiscal and monetary policy without commitment∗

This paper studies optimal fiscal and monetary policy in a stochastic economy with imperfectly competitive product markets and a discretionary government. We find that, in the flexible price economy, optimal time-consistent policy implements the Friedman rule independently of the degree of imperfect competition. This result is in contrast to the Ramsey literature, where the Friedman rule emerge...

Optimality Of Monetary And Fiscal Policies In Iran: An Application Of The Stochastic Optimal Control Theory

Regime Switching Monetary and Fiscal Policies

This note presents a stylized model of monetary and fiscal policies in which policy regime evolves randomly according to a Markov chain. This simple model is designed to illustrate that well-defined and unique equilibria can exist even in such an environment. It also shows that under certain assumptions about policy behavior, tax disturbances can generate wealth effects in line with the fiscal ...