We would like to thank the Australian Research Council for financial support (DP0879638). The usual disclaimer applies.
The Big Picture of Monetary–Fiscal Interactions*
Version of Record online: 5 APR 2011
© 2011 The Economic Society of Australia
Economic Papers: A journal of applied economics and policy
Volume 30, Issue 1, pages 6–14, March 2011
How to Cite
Franta, M., Libich, J. and Stehlík, P. (2011), The Big Picture of Monetary–Fiscal Interactions. Economic Papers: A journal of applied economics and policy, 30: 6–14. doi: 10.1111/j.1759-3441.2011.00105.x
- Issue online: 5 APR 2011
- Version of Record online: 5 APR 2011
- fiscal-monetary policy interaction;
- inflation targeting
The paper offers a schematic game theoretic approach to thinking about medium-term strategic interactions between monetary and fiscal policy. We show that under some circumstances fiscal excesses may spill over to monetary policy, but a legislated commitment to a numerical inflation target can sometimes prevent this through providing the central bank with ammunition to counter-act excessive fiscal actions. As such, a more explicit monetary commitment may have a ‘disciplining effect’ on fiscal policy, and improve fiscal outcomes as well as monetary outcomes. We present some empirical evidence for this finding.