Discussion paper

DP12903 Fiscal and Monetary Regimes: A Strategic Approach

This paper develops a full-fledged strategic analysis of Wallace’s “game of chicken”. A public sector facing legacy nominal liabilities is comprised of fiscal and monetary authorities that respectively set the primary surplus and the price level in a non-cooperative fashion. We find that the post 2008 feature of indefinitely postponed fiscal consolidation and rapid expansion of the Federal Reserve’s balance sheet is consistent with a strategic setting in which neither authority can commit to a policy beyond its current mandate, and the fiscal authority has more bargaining power than the monetary one at each date.

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Citation

Barthélemy, J and G Plantin (eds) (2018), “DP12903 Fiscal and Monetary Regimes: A Strategic Approach”, CEPR Press Discussion Paper No. 12903. https://new.cepr.org/publications/dp12903