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  3. American Economic Review: Insights
  4. September 2024
  5. Central Bank Credibility and Fiscal Responsibility

American Economic Review: Insights

ISSN 2640-205X (Print) | ISSN 2640-2068 (Online)

Central Bank Credibility and Fiscal Responsibility

  • Jesse Schreger
  • Pierre Yared
  • Emilio Zaratiegui
American Economic Review: Insights
vol. 6, no. 3, September 2024
(pp. 377–94)
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Abstract

We consider a New Keynesian model with strategic monetary and fiscal interactions. The fiscal authority maximizes social welfare. Monetary policy is delegated to a central bank with an anti-inflation bias that suffers from a lack of commitment. The impact of central bank hawkishness on debt issuance is nonmonotonic because increased hawkishness reduces the benefit from fiscal stimulus while simultaneously increasing real debt capacity. Starting from high levels of hawkishness (dovishness), a marginal increase in the central bank's anti-inflation bias decreases (increases) debt issuance.

Citation

Schreger, Jesse, Pierre Yared, and Emilio Zaratiegui. 2024. "Central Bank Credibility and Fiscal Responsibility." American Economic Review: Insights, 6 (3): 377–94. DOI: 10.1257/aeri.20230263

Additional Materials

JEL Classification

  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
  • E31 Price Level; Inflation; Deflation
  • E52 Monetary Policy
  • E58 Central Banks and Their Policies
  • E62 Fiscal Policy
  • H63 National Debt; Debt Management; Sovereign Debt