Time Inconsistency: An Updated Survey of the Literature

We provide an updated survey of the literature on time inconsistency, focusing on the key contributions that followed the seminal papers of Kydland and Prescott (1977) and Barro and Gordon (1983a). Starting from the traditional models addressing the time inconsistency problem of monetary policy, we then proceed to analyse the more recent contributions accounting for the important monetary and fiscal policy interactions. We conclude by sketching an encompassing open-economy model summarising the most recent positions concerning the optimal management of fiscal policies.Time Inconsistency, Monetary Policy, Central Banking, EMU, Policy Co-ordination

A Case for Fiscal Policy Co-ordination in Europe

In this paper we analyse the impact of fiscal policy co-ordination in a monetary union on the size of the spending bias, inflation and the optimal degree of conservatism of the central bank. Our main result is that, when the fiscal authorities internalise the spillover effects originating from their loose fiscal stances, the size of the inflation bias decreases. As a result, the optimal degree of conservatism declines as well. Moreover, we show that the Stability Pact can be seen as an optimally designed linear penalty in the utility function of the fiscal authorities. This is able to achieve the same desired result as fiscal policy co-ordination but without an explicit commitment to it.EMU, Fiscal and Monetary Policy Co-ordination, Central Bank Independence, Stability and Growth Pact

Macroeconomic Policy Interactions in the EMU: A Case for Fiscal Policy Co-ordination

We analyse the effects of fiscal policy co-ordination in a monetary union on inflation, public expenditure and the optimal degree of conservatism of the central bank. Our main result is that, when the fiscal authorities internalise the spillover effects originating from their loose fiscal stances, monetary policy commitment problems are mitigated. As a result, the optimal degree of conservatism of the central bank declines. Moreover, we show that the Stability Pact can be seen as an optimally designed linear penalty in the utility function of the fiscal authorities. This is able to achieve the same desired result as fiscal policy co-ordination but without an explicit commitment to it.EMU, Fiscal and Monetary Policy Co-ordination, Central Bank Independence, Stability and Growth Pact.

Reconsidering The Pros and Cons of Fiscal Policy Coordination in a Monetary Union: Should We Set Public Expenditure Targets?

We reconsider the issues of fiscal policy interdependence in a monetary union, challenging the view that non co-ordination is always preferable. Moreover, we show that an expenditure bias occurs irrespective of the fiscal regime in place. We argue that a contractualist approach à la Walsh should be extended to the conduct of fiscal policy, setting explicit public expenditure targets.EMU, Fiscal Leadership, ECB, Fiscal Co-ordination, Inflation Targets

Implicit tax co-ordination under repeated policy interactions

In the context of a stylised gaine theoretical framework of capital tax competition, we show that when repeated policy interactions are associated to a systematic punishment of the deviating policymaker, a coordinated outcome can be the solution to the non cooperative tax game. This resuit suggests that explicit forms of policy coordination, such as a centralised tax authority, could in fact be largely unnecessary.Policy coordination, international fiscal issues

Reconsidering The Pros and Cons of Fiscal Policy Co-ordination in a Monetary Union: Should We Set Public Expenditure Targets ?

We reconsider the merits of fiscal policy co-ordination in a monetary union distinguishing between and inflation targeting regime and delegation to a weight conservative central bank. We argue that a contractualist approach a la Walsh should be extended to the conduct of fiscal policy, setting explicit public expenditure targets.EMU, Fiscal Leadership, ECB, Fiscal Co-ordination, Inflation Targets

Implicit tax co-ordination under repeated policy interactions

In the context of a stylised game theoretical framework of capital tax competition, we show that when repeated policy interactions are associated to a systematic punishment of the deviating policymaker, a co-ordinated outcome can be the solution to the non co-operative tax game. This result suggests that explicit forms of policy co-ordination, such as a centralised tax authority, could in fact be largely unnecessary. JEL Classification: E61, H87International Fiscal Issues, Policy Co-ordination

The predictability of monetary policy.

Current best practice in central banking views a high level of monetary policy predictability as desirable. A clear distinction, however, has to be made between short-term and longer-term predictability. While short-term predictability can be narrowly defined as the ability of the public to anticipate monetary policy decisions correctly over short horizons, the broader, ultimately more meaningful concept of longerterm predictability also encompasses the ability of the private sector to understand the monetary policy framework of a central bank, i.e. its objectives and systematic behaviour in reacting to different circumstances and contingencies. In this broader sense, longer-term predictability is also closely related to the credibility of the central bank. This paper reviews the main conceptual issues relating to predictability, both in its short and longer-term dimensions, and discusses how a transparent monetary policy strategy can be – and indeed has been – instrumental in achieving this purpose. This latter aspect is investigated in an overview of the empirical literature, highlighting how financial markets have been increasingly able to correctly anticipate monetary policy decisions for a number of large central banks, including the ECB. The paper also reviews several possible empirical proxies for the less-explored concept of longer-term predictability, which is inherently more diffi cult to measure. JEL Classification: E52, E58, E61.Predictability, central bank transparency, central bank communication.