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  5. Central Bank Credibility and Fiscal Responsibility

Central Bank Credibility and Fiscal Responsibility

  • Jesse Schreger
  • Pierre Yared
  • Emilio Zaratiegui
American Economic Review: Insights (Forthcoming)

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 non-monotonic 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.

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