Do we really need to tame a conservative ECB? When the policy mix matters

Marco Lossani, Piergiovanna Natale () and Patrizio Tirelli
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Marco Lossani: Catholic University of Milan-Bicocca

No 18, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: This paper contributes to the goal-versus-instrument independence debate for the ECB exploring how these alternative monetary arrangements perform when the fiscal authority pursues a strategy of debt reduction in the long term but retains fiscal flexibility in response to supply shocks. If fiscal policy is sufficiently flexible, appointing a goal independent (i.e. conservative) central banker dominates inflation targeting. In fact, as the fiscal authority and the central bank act independently in setting their countercyclical policies, an activist central banker causes excess volatility of inflation. This result provides theoretical content to the claim that a strong and goal-independent ECB needs a political match able to engineer countercyclical fiscal policies.

Pages: 19 pages
Date: 1997-10, Revised 1998-11
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