Delegation and Fiscal Policy in the Open Economy: More Bad News for Rogoff's Delegation Game |
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Authors: | Levine Paul Pearlman Joseph |
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Institution: | (1) Department of Economics, University of Surrey and CEPR, Guildford, Surrey, GU2 5XH, U.K.;(2) Department of Economics, London Guildhall University, 31 Jewry Street, London, EC3N 2EY, U.K. |
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Abstract: | This article studies the open-economy Rogoff delegation game, taking into account both intra-country and intercountry interactions between fiscal authorities and central banks. With representative bankers, the Nash equilibrium of fiscal and monetary authorities independently responding to supply-side shocks sees insufficient monetary adjustment and an imbalance towards fiscal stabilization if shocks are sufficiently symmetric; the opposite occurs if shocks are sufficiently asymmetric. Appointing conservative bankers shifts the fiscal–monetary balance away from monetary towards fiscal policy. Unilateral delegation benefits that country; but when all countries independently delegate, the outcome is only favorable if shocks are sufficiently asymmetric. |
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Keywords: | delegation game fiscal policy monetary policy conservative bankers |
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