Fiscal Policy Without Commitment Leads to Excessive Public Spending
The article explores the impact of monetary conservatism on fiscal policy in an economy with sticky prices and monopolistic distortions. The researchers find that lack of fiscal commitment leads to excessive public spending, while lack of monetary commitment results in too much inflation. A conservative monetary authority is still necessary in this scenario. When fiscal policy is determined before monetary policy each period, focusing on stabilizing inflation eliminates biases and leads to close to optimal stabilization policy.