Strategic Interactions between an Independent Central Bank and a Myopic Government with Government Debt.
We analyse optimal discretionary games between a benevolent central bank and a myopic government in a New Keynesian model. First, when lump-sum taxes are available and public debt is absent, we show that a Nash game results in too much government spending and excessively high interest rates, while f...
| Hlavní autoři: | , |
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| Médium: | Working paper |
| Jazyk: | English |
| Vydáno: |
International Monetary Fund
2008
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| _version_ | 1826276967265075200 |
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| author | Stehn, S Vines, D |
| author_facet | Stehn, S Vines, D |
| author_sort | Stehn, S |
| collection | OXFORD |
| description | We analyse optimal discretionary games between a benevolent central bank and a myopic government in a New Keynesian model. First, when lump-sum taxes are available and public debt is absent, we show that a Nash game results in too much government spending and excessively high interest rates, while fiscal leadership reinstates the cooperative outcome under discretion. Second, we show that this familiar result breaks down when lump-sum taxes are unavailable. With government debt, the Nash equilibrium still entails too much public spending but leads to lower interest rates than the cooperative policy, because debt has to be adjusted back to its pre-shock level to ensure time consistency. A setup of fiscal leadership does not avoid this socially costly outcome. Imposing a debt penalty onto the myopic government under either Nash or fiscal leadership raises welfare substantially, while appointing a conservative central bank is less effective. |
| first_indexed | 2024-03-06T23:21:48Z |
| format | Working paper |
| id | oxford-uuid:68fa27bc-a658-4dd4-8577-7df5db2316a5 |
| institution | University of Oxford |
| language | English |
| last_indexed | 2024-03-06T23:21:48Z |
| publishDate | 2008 |
| publisher | International Monetary Fund |
| record_format | dspace |
| spelling | oxford-uuid:68fa27bc-a658-4dd4-8577-7df5db2316a52022-03-26T18:48:29ZStrategic Interactions between an Independent Central Bank and a Myopic Government with Government Debt.Working paperhttp://purl.org/coar/resource_type/c_8042uuid:68fa27bc-a658-4dd4-8577-7df5db2316a5EnglishDepartment of Economics - ePrintsInternational Monetary Fund2008Stehn, SVines, DWe analyse optimal discretionary games between a benevolent central bank and a myopic government in a New Keynesian model. First, when lump-sum taxes are available and public debt is absent, we show that a Nash game results in too much government spending and excessively high interest rates, while fiscal leadership reinstates the cooperative outcome under discretion. Second, we show that this familiar result breaks down when lump-sum taxes are unavailable. With government debt, the Nash equilibrium still entails too much public spending but leads to lower interest rates than the cooperative policy, because debt has to be adjusted back to its pre-shock level to ensure time consistency. A setup of fiscal leadership does not avoid this socially costly outcome. Imposing a debt penalty onto the myopic government under either Nash or fiscal leadership raises welfare substantially, while appointing a conservative central bank is less effective. |
| spellingShingle | Stehn, S Vines, D Strategic Interactions between an Independent Central Bank and a Myopic Government with Government Debt. |
| title | Strategic Interactions between an Independent Central Bank and a Myopic Government with Government Debt. |
| title_full | Strategic Interactions between an Independent Central Bank and a Myopic Government with Government Debt. |
| title_fullStr | Strategic Interactions between an Independent Central Bank and a Myopic Government with Government Debt. |
| title_full_unstemmed | Strategic Interactions between an Independent Central Bank and a Myopic Government with Government Debt. |
| title_short | Strategic Interactions between an Independent Central Bank and a Myopic Government with Government Debt. |
| title_sort | strategic interactions between an independent central bank and a myopic government with government debt |
| work_keys_str_mv | AT stehns strategicinteractionsbetweenanindependentcentralbankandamyopicgovernmentwithgovernmentdebt AT vinesd strategicinteractionsbetweenanindependentcentralbankandamyopicgovernmentwithgovernmentdebt |