Download Strategic Interaction between Fiscal and Monetary Policies in an

Strategic Interaction
between Fiscal and Monetary Policies
in an Export-Oriented Economy
Sergey Merzlyakov
Junior Research Fellow of the Laboratory for Macroeconomic Analysis
National Research University Higher School of Economics, Moscow
Contents
 Motivation
 Literature on Fiscal and Monetary Policy Interaction
 Model
 Strategic Interaction
 Conclusion
Motivation
 Why strategic interaction?
 Complementary policy instruments
 Joint constraint
 Peculiarity of macroeconomic development in an
export-oriented economy
 Optimal macroeconomic policy design
 Central bank independence: do we really need it?
Literature review
 Fiscal and monetary policy interaction: Christ (1979),
Sargent and Wallace (1981), Blinder (1982)
 Strategic complementarity instruments: Andersen and
Schneider (1986), Dixit and Lambertini (2003)
 New political economy in macroeconomics setup:
Drazen (2000), Persson and Tabellini (2000)
Two-period model
Key points
 Fiscal policy
 Discretionary policy (lump-sum taxes, government expenditure)
 Automatic stabilizers (taxes that depend on export and output)
 Stabilization fund (as the sterilization mechanism of excessive money)
 Monetary policy
 The only transmission monetary channel is foreign currency operations
 Exchange rate target
 Export and import depend on exchange rate
 By changing the international reserves,
the central bank changes the supply of money
Endogenous variables: Y1 , 1 , 1 , 1 , M E1 , s1 , z1
Predetermined variables: all variables in period 0
Policy variables: x, e1
Model
M E1V x   P1Y1

Aggregate Demand
 1   0   Y1  Y *    1   0 

Phillips Curve
s1  s0  E0 Ex0  tY0  x P0

Government Budget Constraint
Ex0  Im0  CF0  z1  z0

Balance of Payment
M1  M 0  z1  z0 E1

Foreign Exchange Market
Operations
M1  M 0  s1  s0  M E1  M E 0

Money in Circulation
E1  P11

Real Exchange Rate

Social Loss Function
LS 

1 2
2
 1   eS e12   YS Y1  Y 
2

Forms of strategic interaction
 Dependent central bank: fiscal and monetary policy coordination
 Independent central bank:
 Stackelberg interaction with the government leadership
 Cournot interaction (central bank and government do not take each
others’ actions into account when choosing their policies)
The government loss:
The central bank loss:

1
 
2
1 2
2
2
LF   1   xF x  x    YF Y1  Y 
2
LM
2
1
  e   YM Y1  Y 
2
eM 1
2


Coordination: the loss function
LF  M

1
2
2
2
 1    1  YM  YF Y1  Y    eM e12   XF x  x 
2
 What is the optimal bargaining power of the
government relative to the central bank?

Coordination: the bargaining power
1,2
0,00020
0,986
1,0
0,00018
0,00016
0,00014
0,8
0,00012
0,6
0,00010
0,00008
0,4
0,00006
0,00004
0,099
0,2
0,000118
0,005045
0,010
0,00002
0,0
0,00000
0,01
0,5
1
10
100
Bargaining power
Government and central bank loss
Social loss
 Coordination is effective only if the bargaining power of the central
bank is relatively large
Central bank independence:
agents’ losses
0,00035
0,00030
0,00025
0,00020
0,00015
0,00010
0,00005
0,00000
alphaYF
0
0,05
0,75
1
1,5
2,5
10
Lm
0,000223
0,000195
0,000092
0,000076
0,000062
0,000043
0,000022
Lf
0,000005
0,000012
0,000103
0,000123
0,000154
0,000193
0,000303
Ls
0,000166
0,000146
0,000070
0,000059
0,000048
0,000035
0,000019
 Agents’ losses are sensitive to fiscal policy
Conclusion
 In an export-oriented economy the independence of the central
bank does not play a significant role
 Coordination is preferable if the bargaining power of the central
bank is relatively large
 Interaction with the government leadership is preferable if the
output is government priority
 Next: to compare different monetary policy regimes (exchange
rate target vs. growth rate of money target), to analyze other
forms of strategic interaction (the central bank leadership)
Thank you for your attention!