Economics, Econometrics and Finance
4 years ago

Conservative Central Bank Policies Lead to Poor Macroeconomic Stabilization

RePEc: Research Papers in Economics
Monetary-Fiscal Interactions with a Conservative Central Bank
Luisa Lambertini

Paper Summary

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Monetary and fiscal policies interact in ways that can lead to poor macroeconomic stabilization. When both policies are discretionary, the outcome is often not optimal, with higher output and lower inflation than desired. Commitment from both monetary and fiscal authorities, or identical targets for both, is needed for optimal stabilization. Commitment from just one authority is not enough to achieve the best results.