DP3395 Government Leadership and Central Bank Design

Author(s): Andrew Hughes Hallett , Diana Weymark

Publication Date: May 2002

Keyword(s): central bank independence , monetary policy delegation , policy coordination , policy game , policy leadership

JEL(s): E52 , E61 , F42

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP3395.asp

This article investigates the impact on economic performance of the timing of moves in a policy game between the government and the central bank for a government with both distributional and stabilization objectives. It is shown that both inflation and income inequality are reduced without sacrificing output growth if the government assumes a leadership role compared to a regime in which monetary and fiscal policy is determined simultaneously. Further, it is shown that government leadership benefits both the fiscal and monetary authorities. The implications of these results for a country deciding whether to join a monetary union are also considered.