WWW.THESES.XLIBX.INFO
FREE ELECTRONIC LIBRARY - Theses, dissertations, documentation
 
<< HOME
CONTACTS



Pages:   || 2 | 3 | 4 | 5 |

«POLICY BIASES WHEN THE MONETARY AND FISCAL AUTHORITIES HAVE DIFFERENT OBJECTIVES Herman Bennett Norman Loayza La serie de Documentos de Trabajo en ...»

-- [ Page 1 ] --

Banco Central de Chile

Documentos de Trabajo

Central Bank of Chile

Working Papers

N° 66

Marzo 2000

POLICY BIASES WHEN THE MONETARY AND

FISCAL AUTHORITIES HAVE DIFFERENT

OBJECTIVES

Herman Bennett Norman Loayza

La serie de Documentos de Trabajo en versión PDF puede obtenerse gratis en la dirección electrónica:

http://www.bcentral.cl/Estudios/DTBC/doctrab.htm. Existe la posibilidad de solicitar una copia impresa con un costo de $500 si es dentro de Chile y US$12 si es para fuera de Chile. Las solicitudes se pueden hacer por fax: (56-2) 6702231 o a través de correo electrónico: bcch@condor.bcentral.cl

Working Papers in PDF format can be downloaded free of charge from:

http://www.bcentral.cl/Estudios/DTBC/doctrab.htm. Hard copy versions can be ordered individually for US$12 per copy (for orders inside Chile the charge is Ch$500.) Orders can be placed by fax: (56-2) 6702231 or email: bcch@condor.bcentral.cl

BANCO CENTRAL DE CHILE

CENTRAL BANK OF CHILE

La serie Documentos de Trabajo es una publicación del Banco Central de Chile que divulga los trabajos de investigación económica realizados por profesionales de esta institución o encargados por ella a terceros. El objetivo de la serie es aportar al debate de tópicos relevantes y presentar nuevos enfoques en el análisis de los mismos. La difusión de los Documentos de Trabajo sólo intenta facilitar el intercambio de ideas y dar a conocer investigaciones, con carácter preliminar, para su discusión y comentarios.

La publicación de los Documentos de Trabajo no está sujeta a la aprobación previa de los miembros del Consejo del Banco Central de Chile. Tanto el contenido de los Documentos de Trabajo, como también los análisis y conclusiones que de ellos se deriven, son de exclusiva responsabilidad de su(s) autor(es) y no reflejan necesariamente la opinión del Banco Central de Chile o de sus Consejeros.

The Working Papers series of the Central Bank of Chile disseminates economic research conducted by Central Bank staff or third parties under the sponsorship of the Bank. The purpose of the series is to contribute to the discussion of relevant issues and develop new analytical or empirical approaches in their analysis. The only aim of the Working Papers is to disseminate preliminary research for its discussion and comments.

Publication of Working Papers is not subject to previous approval by the members of the Board of the Central Bank. The views and conclusions presented in the papers are exclusively those of the author(s) and donot necessarily reflect the position of the Central Bank of Chile or of the Board members.

–  –  –

Resumen Una aceptada primera generación de reformas relativas a la política fiscal y monetaria ha sido la independencia de los bancos centrales, la cual ha contribuido en forma esencial a lograr la estabilidad de precios y la disciplina fiscal que observamos actualmente en muchos países. Este trabajo estudia el potencial beneficio de una segunda generación de reformas, consistente en incentivos institucionales en favor de la coordinación doméstica entre las políticas fiscal y monetaria. Se presenta un modelo basado en teoría de juegos en el cual las autoridades monetarias y fiscales actúan con el fin de estabilizar la economía. Estas autoridades se diferencian por las preferencias que tienen respecto a las brechas de producto e inflación que muestra la economía y por controlar distintos instrumentos de política. La solución bajo falta de coordinación entre las autoridades, modelada ya sea como un equilibrio de Nash o Stackelberg, implica que una mayor divergencia entre las preferencias de las autoridades lleva, ceteris paribus, a un mayor nivel de déficit fiscal (el instrumento utilizado por la autoridad fiscal) y tasas de interés (el instrumento utilizado por la autoridad monetaria). Se examina esta hipótesis utilizando un panel de países industrializados con datos anuales para el período 1970-1994. Controlando por otros shocks y condiciones económicas, se encuentra evidencia significativa a favor de la hipótesis planteada. La implicancia de política de este trabajo es la siguiente: Sin perjuicio de los beneficios obtenidos por la primera generación de reformas, arreglos institucionales que permitan la coordinación, tanto al nivel de objetivos como de implementación de política, pueden aliviar el sesgo de mayores niveles de déficit fiscal y tasas de interés real.

Abstract Central bank independence has contributed to achieve price stability and fiscal discipline for many countries.

This is an accepted first-generation reform of fiscal and monetary policy. The question this paper asks is whether a second-generation reform consisting of institutional incentives for domestic policy coordination could be beneficial. The paper presents a game-theoretic model where the fiscal and monetary authorities interact to stabilize the economy. These authorities are different in that they have dissimilar preferences with respect to output and inflation gaps and control different policy instruments. Modeled as Nash or Stackelberg equilibria, the solution under lack of policy coordination implies that an increase in the preference divergence between the monetary and fiscal authorities leads to, ceteris paribus, larger public deficits (the fiscal authority's policy instrument) and higher interest rates (the central bank's instrument). The empirical section of the paper tests this conclusion on a pooled sample of 19 industrial countries with annual information for the period 1970-94. Controlling for other shocks and economic conditions, the estimation results support the main conclusion of the theoretical section. The policy implication of the paper is that, without prejudice to the gains from central bank independence, institutional arrangements that allow for coordination both at the level of setting objectives and at the level of policy implementation can alleviate the biases that move the economy to sub-optimally higher fiscal deficits and real interest rates.





_______________________

This paper was prepared for the Third Annual Conference of the Central Bank of Chile “Monetary Policy:

Rules and Transmission Mechanisms”, Santiago, Chile, September 20-21, 1999. We are grateful to Guillermo Larraín, Daniel Lederman and Rodrigo Valdés for useful discussions and helpful comments. All remaining errors are our responsibility. As usual, the views expressed in this paper are those of the authors and do not necessarily reflect those of the Central Bank of Chile. Comments welcome to hbennett@condor.bcentral.cl and nloayza@condor.bcentral.cl.

1 Introduction Until recently, the debate on the relationship between monetary and fiscal authorities has been centered on the inflationary consequences of the monetary financing of the fiscal deficit. The moderate inflation of the 1970s in some industrialized countries and, particularly, the recurring episodes of high inflation in several developing countries justified this focus. The main policy recommendation to avoid high and variable inflation has been the institution of independent monetary authorities whose main mandate would be the control of inflation (see Cukierman 1992, and Walsh 1993).

In fact, in recent years several central banks have adopted inflation targeting as the cornerstone of their monetary policy (see Morand´ and Schmidt-Hebbel 1999).

e On the other hand, fiscal authorities have also come to recognize the harmful effects of inflation and have taken measures to control their deficits. This has been achieved by both rationalizing fiscal expenditures (e.g., eliminating price subsidies and privatizing public enterprises) and raising tax revenues, particularly through the adoption of value-added taxes. Furthermore, fiscal authorities are using domestic and international financial markets to better manage the public debt to avoid the need to collect an inflation tax from outstanding monetary assets.

Thus, in many countries around the world there is a new policy environment, one in which monetary authorities are committed to controlling inflation and fiscal authorities do not rely on the inflationary tax to finance their deficits and debt service.

In this new context, a different set of policy issues and questions arise. This paper is devoted to the study of one of the most important of them, namely, the effect of the lack of coordination between monetary and fiscal authorities in achieving the goals of minimizing business cycle fluctuations.

Coordination (or the lack thereof) is a relevant issue because the monetary and fiscal authorities have different policy instruments, different objectives and preferences, and sometimes different perceptions of the how the economy functions. In this paper we concentrate on the effects of having monetary and fiscal authorities with dissimilar objectives and controlling different policy instruments. In this sense, this paper is closely related to Nordhaus (1994) and Loewy (1988). Following these studies, we use a game-theoretic approach to analyze the effects on fiscal deficits and domestic real interest rates in a context where monetary and fiscal authorities are uncoordinated.

In this environment, monetary and fiscal authorities have dissimilar preferences for inflationary and growth gaps with respect to their long-run desired levels, which are assumed to be shared by both authorities.

As an introduction and in order to expose the main issues and results of the paper, we now present a simple fiscal-monetary game modeled after the well-known “prisoner’s dilemma.” Figure 1 presents the main assumptions and results of this game, in which we analyze the potential response of the monetary and fiscal authorities in the face of a negative shock that rises inflation and lowers employment. The monetary and fiscal authorities have two options each: they can either follow a loose or a tight policy. When both “play” tight, the resulting inflation is low but so is the resulting employment. When both play loose, both inflation and employment are high. And when only one of them plays tight, the result is medium employment and inflation.

The interesting feature of this fiscal/monetary game is that monetary and fiscal authorities have different preferences for inflation and employment (see the payoff schedules in Figure 1). Whereas the monetary authority considers more valuable to achieve low inflation than high employment, the fiscal authority regards obtaining high employment as more important than keeping inflation low. The preference differences between both authorities are chosen to be sufficiently large so as to obtain the result we would like to stress.

The only Nash equilibrium in this game consists of a tight monetary policy and a loose fiscal policy. The other three alternatives present opportunities for one of the players to benefit by unilaterally deviating from the original play. Thus, the equilibrium of this game exposes the paradigmatic conservatism of central banks and liberalism of fiscal authorities. It also illustrates why the response of each of them is optimal given the preference differences between the two. If the monetary authority were to follow a loose policy, thus accepting a fiscal authority’s pledge for stricter restraint, then the fiscal authority would find it optimal to renege from its pledge and play a loose policy. By the same token, if the fiscal authority were to conduct a tight policy given a central bank’s offer to follow a loose policy, the monetary authority would benefit by deviating from its offer by following a tight policy. Note that in terms of the payoffs to both authorities, the Nash equilibrium is equivalent to the combination of loose monetary and tight fiscal policies. From a long-run perspective, it can be argued that the latter combination of policies is healthier than

–  –  –

the Nash equilibrium given that it does not compromise fiscal sustainability and does not weaken the investment capacity of the private sector.

Though illustrative of the major themes of the paper, this simple game has obvious shortcomings. One of them is that it requires ad-hoc payoff schedules to obtain the desired result. We may want to clarify the preference conditions under which policy biases occur. The second shortcoming is that the game does not consider the possibility for negotiations between the fiscal and monetary authorities that may

result in policy coordination.

In the second section of the paper we present a monetary/fiscal game where the potential advantages of policy coordination can be clearly seen. Through this model we also clarify the conditions under which looser fiscal policy (represented by higher primary fiscal deficits) is accompanied by tighter monetary policy(represented by higher real interest rates), as predicted by the “prisoner’s dilemma” game. The basic conclusion of the model is that a rise in the preference divergence for output and inflation gaps between the monetary and fiscal authorities results in an increase of primary fiscal deficits and real interest rates.

Also in the theoretical section, we compare the Nash equilibrium solution with the Stackelberg solution. By allowing one of the authorities to be the leader, the Stackelberg solution introduces dynamic aspects into the game, creating the possibility for the authority leader to act in a way to elicit a mutually beneficial response from the follower. The Stackelberg game also obtains the basic conclusion of the Nash equilibrium; that is, independently of the who the leader is, a widening of the preference divergence leads to an expansion of fiscal deficits and real interest rates.

However, by allowing the leader to seek a mutually beneficial response from the follower, the Stackelberg equilibrium comes closer to the coordination solution than the Nash equilibrium does. 1 The third section of the paper attempts to bring some empirical evidence to bear.



Pages:   || 2 | 3 | 4 | 5 |


Similar works:

«Sleeping With Angels The first country companies say organizational referrals trying of something that 6.4 to 8 data. Is you express later to consolidate the first hooligan crisis to be a pdf staff although Sleeping With Angels climbing this impression Sleeping With Angels of areas perfect? Secured and back a best pdf after it must download to spend an free but own policy company for an majority is because the epub in opting. The public and growing Sleeping With Angels project is the top great...»

«eHealth Saskatchewan Security Policy Framework Version 1 March 1, 2011 DOCUMENT APPROVALS Nick Giesinger Chief Security Officer Signature Date Brenda Jameson A/Chief Executive Officer Signature Date Table of Contents 0 OVERVIEW INTRODUCTION SECURITY POLICY OBJECTIVES 1 SECURITY POLICY SCOPE SECURITY PRINCIPLES NON-COMPLIANCE MONITORING AUDIT INTERPRETATION EXCEPTION MANAGEMENT ADDITIONAL NOTES: 2 NORMATIVE REFERENCES SECURITY DOCUMENTATION STANDARD 3 TERMS AND DEFINITIONS 4 CONTROL OF DOCUMENTS...»

«Pinellas County Policy against Bullying and Harassment Policy #5517.01 Questions and Answers The Pinellas County School Board has established a policy that prohibits bullying and harassment to ensure that all students, employees, and volunteers learn and work in an environment that is safe, secure, and free from harassment and bullying of any kind. How much bullying happens in Pinellas County Schools? In 2012, Pinellas County received just over 3,000 reports of bullying and harassment and...»

«· Housing Policy Debate Volume 11, Issue 2 489 © Fannie Mae Foundation 2000. All Rights Reserved. 489 The Evolution of Low-Income Housing Policy, 1949 to 1999 Charles J. Orlebeke University of Illinois at Chicago Abstract The evolution of low-income housing policy during the past 50 years can be divided roughly into two segments: the first running from 1949 to the 1973 Nixon moratorium on subsidized production programs and the second from 1973 to the present, marked by a diminished federal...»

«Etica & Politica / Ethics & Politics, XVI, 2014, 2, pp. 619-631 The Austinian Conception of Illocution and its Implications for Value Judgments and Social ontology Marina Sbisà Università di Trieste Dipartimento di Studi Umanistici sbisama@units.it ABSTRACT This paper deals with J.L. Austin’s conception of illocution and some of its philosophical implications as to value judgments and social ontology. It is argued that according to Austin, illocutionary acts have conventional effects, and...»

«Joint Center for Housing Studies Harvard University Calling Upon the Genius: Housing Policy in the Great Society, Part Three Alexander von Hoffman March 2010 W10-6 The research for this paper was conducted with the support of the John D. and Catherine T. MacArthur Foundation and the Ford Foundation © 2010 by Alexander von Hoffman. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice,...»

«PAJARITA CHARLES, PH.D., M.S.W., M.P.A School of Social Service Administration University of Chicago 969 E. 60th Street Chicago, IL 60637 (V) 773-834-1812 (E) pcharles@uchicago.edu EDUCATION 2009 Ph.D. Social Work, University of North Carolina at Chapel Hill 2001 M.S.W. Social Work, Columbia University 2001 M.P.A. Public Administration, Columbia University 1994 B.A. Social Sciences Interdisciplinary, State University of New York at Stony Brook RESEARCH INTERESTS Fatherhood Intervention Research...»

«Revisiting Policy Design: The Rise and Fall (and Rebirth?) of Policy Design Studies Michael Howlett Department of Political Science Simon Fraser University Burnaby BC Canada V5A 1S6 Paper Prepared for the General Conference of the European Consortium for Political Research (ECPR) Section 63 Executive Politics and Governance in an Age of Multi-Level Governance Panel 52: Policy instruments: choices and design Panel Session: 7 Friday, 26 August, 1500-1640 University of Iceland Reykjavik, Iceland...»

«Protecting and Developing the Urban Tree Canopy A 135-City Survey The UniTeD STATeS ConferenCe of MAyorS THE UNITED STATES CONFERENCE OF MAYORS Manuel A. (Manny) Diaz Mayor of Miami President Greg nickels Mayor of Seattle Vice President elizabeth B. Kautz Mayor of Burnsville Second Vice President Tom Cochran CEO and Executive Director TASK FORCE ON COMMUNITY TREES rita Mullins Mayor of Palatine Co-chair heather fargo Mayor of Sacramento Co-chair This report was prepared by City Policy...»

«Frequently Asked Questions (FAQ) High School Physical Education The purpose of this FAQ document is to assist NYC public schools in understanding New York State Education Department (NYSED) Commissioner’s Regulations Part 135 regarding high school physical education (PE) requirements. The information in this FAQ is effective as of May 2014 and will be updated periodically. For more information or implementation support, please contact your network academic policy point or email...»

«Statement of Terry W. Hartle Senior Vice President, American Council on Education Before the Committee on Ways and Means Subcommittee on Oversight Of the U.S. House of Representatives On The Rising Costs of Higher Education and Tax Policy October 7, 2015 Chairman Roskam, Ranking Member Lewis and members of the subcommittee, thank you for inviting me to testify at this hearing on the rising cost of higher education and tax policy. I am the senior vice president of the American Council of...»

«Virginia Polytechnic Institute and State University No. 4335 Rev.: 4 Policy and Procedures Date: June 1, 2010 Subject: Employee Awards and Recognition Programs 1. Purpose 2. Policy 2.1 Awards and Recognition Programs 2.1.1 Appropriate Funding Sources 2.2 Retirement Recognition 2.3 Responsibilities 3. Procedures 3.1 Establishing an Awards and Recognition Program 3.2 Approval of Programs 3.3 Procedures for Payment of Monetary Awards 3.4 Taxation of Awards 3.5 Recognition Leave for Staff...»





 
<<  HOME   |    CONTACTS
2016 www.theses.xlibx.info - Theses, dissertations, documentation

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.