Goyal, Ashima (2002): Coordinating monetary and fiscal policies: a role for rules? Published in: India Development Report (2002)
Download (185kB) | Preview
The chapter argues for rules to coordinate monetary and fiscal policies. But the rules are rule like only in imposing forward-looking behaviour, while they allow the discretion to respond to shocks. They would serve to anchor expectations, and align private sector actions with desired outcomes. Many countries have used rules, but credible rules have to be suited to a country’s circumstances, which include both structure and political economy. These aspects help to explain past policy choices and outcomes in India, such as the relatively low inflation, even though monetary policy was not autonomous. Prices were kept down partly through administrative measures and subsidy schemes. This led to distortions that lowered efficiency and growth. The constraints need to be stricter for fiscal compared to monetary policy, in order to restrain the competitive populism of elected governments. If fiscal-deficit zone targeting restrains government consumption expenditure while protecting essential expenditure on physical and human capital, it would become possible to lower Indian real interest rates closer to world levels. Recent advances in the theory of monetary policy show how the CB can influence the real interest rate in the short- to medium-run, taking account of expected inflation in setting nominal interest rates while smoothing the latter. Exchange rate policy could also be further fine-tuned to fulfil the objectives of stabilising prices, stimulating exports, and preventing a currency crisis. Since accountability, in a democratic polity, forces the CB to keep inflation low, a weak constraint on the CB, such as medium-term inflation zone targeting, is credible. This would allow productivity improvement to decrease inflation, under expanding potential output.
|Item Type:||MPRA Paper|
|Original Title:||Coordinating monetary and fiscal policies: a role for rules?|
|Keywords:||monetary fiscal policy coordination, rules, constrained discretion|
|Subjects:||E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
|Depositing User:||ashima goyal|
|Date Deposited:||05. Mar 2011 19:47|
|Last Modified:||17. Feb 2013 22:31|
Alesina, A. and R. Perotti 1995, 'The political economy of budget deficits', IMF Staff Papers, vol. 42, no. 1, pp.1-31.
Allsop, C. and D.Vines (2000), 'The assessment: Macroeconomic policy', Oxford Review of Economic Policy, vol. 16, no. 4, pp.1-32.
Bean, C. (1998), 'The new monetary arrangements: a view for the literature', The Economic Journal, vol. 108, no. 451, pp. 1795-1809.
Bernanke, B.S. and F. Mishkin (1997), 'Inflation targeting: A new framework for monetary policy?' Journal of Economic Perspectives, vol. 11, no. 2, pp. 97-116.
Bernanke, B.S. and I. Mihov (1997), 'What does the Bundesbank target?' European Economic Review, vol. 41, no. 6, pp. 1025-53.
Blanchard, O. (1997), 'Is there a core of usable macroeconomics?' AEA Papers and Proceedings, vol. 87, no. 2, pp. 244-6.
Blanchard, O. (2000), Macroeconomics, Second Edition, Prentice Hall, New Jersey.
Blinder, A. (1997), 'Is there a core of practical macroeconomics that we should all believe?' AEA Papers and Proceedings, vol. 87, no. 2, pp. 240-243.
Cecchetti, S.G. (2000), 'Making monetary policy: Objectives and rules', Oxford Review of Economic Policy, vol. 16, no. 4, pp. 43-59.
Clarida, R., J. Gali and M. Gertler (1999), 'The science of Monetary Policy: A New Keynesian Perspective’, Journal of Economic Literature, vol. 37, no. 4, pp. 1661-707.
Eichenbaum, M. (1997), 'Some thoughts on practical stabilization policy' AEA Papers and Proceedings, vol. 87, no. 2, pp. 236-9.
EPWRF (1998), National Accounts Statistics of India (1950-1 to 1996-7), Economic and Political Weekly Research Foundation Sameeksha Trust, Mumbai.
Fischer, S. (1982), 'Seignorage and the case for national money', Journal of Political Economy, vol. 90, no. 21, pp. 295-313.
Furman, J. and J. E. Stiglitz (1999), 'Economic Crises: Evidence and Insights from East Asia', Brookings Papers on Economic Activity, vol. 2, pp. 1-114.
Goodhart, C. (1989), 'The Conduct of Monetary Policy', Economic Journal, vol. 99, pp. 293-346.
Government Of India (GOI) (2001), Indian Economic Survey 2000-2001,
Goyal, A. (1999), 'The political economy of the revenue deficit', in the India Development Report, K. S. Parikh (ed.), IGIDR and Oxford University Press, New Delhi.
Goyal, A. (2000a), 'Reform proposals from developing Asia: Finding a win-win strategy', in Leslie Elliott Armijo (ed.), Debating the Global Financial Architecture, (forthcoming) in SUNY Press Global Politics series, under the general editorship of James Rosenau, SUNY Press, New York.
Goyal, A. (2000b), 'Balancing the budget', The Economic Times, 12 December.
Hendry, D. and G.E. Mizon (2000), ' Reformulating Empirical Macroeconometric Modelling', Oxford Review of Economic Policy, vol. 16, no. 4, pp. 138-59.
IMF (2001), World economic outlook: Fiscal policy and macroeconomic stability, IMF, Washington D.C.
Jalan, B. (2001), 'Monetary and credit policy for the year 2001-2002', Statement by Dr. Bimal Jalan, Governor, Reserve Bank of India, April, available at www.cpolicy.rbi.in.
Jensen, H. (1997), 'Credibility of optimal monetary delegation, American Economic Review, pp. 911-920.
Krugman, P.R. (1998), 'It’s Baaack: Japan’s slump and the return of the liquidity trap', Brookings Papers on Economic Activity, vol. 2.
Leith, C. and S. Wren-Lewis (2000), 'Interactions between monetary and fiscal policy', The Economic Journal, vol. 110, pp. 93-108.
Ljungqvist, L. and T.L. Sargent (2000), Recursive Macroeconomic Theory, MIT Press, Massachusetts.
Lohmann, S. (1992), 'Optimal commitment in monetary policy: credibility versus flexibility', American Economic Review, vol. 82 (March), pp. 273-86.
MaCallum, B. (1997), 'Crucial Issues concerning central bank independence', Journal of Monetary Economics, vol. 39, pp. 99-112.
Mankiw, Gregory N. (ed.) (1994), Monetary Policy, University of Chicago Press for NBER, Chicago, IL.
McKibben, W.J. and D. Vines (2000), 'Modelling reality: The need for both inter-temporal optimization and stickiness in models for policy-making', Oxford Review of Economic Policy, vol. 16, no. 4, pp. 106-37.
Mishkin, F.S. (1995), 'Symposium on the monetary transmission mechanism', Journal of Economic Perspectives, vol. 9, no. 4, pp. 3-10.
Mishkin, F.S. (1999), 'International experience with monetary policy rules, Journal of Monetary Economics, vol. 43, pp. 579-606, June.
Piga, G. (2000), 'Dependant and accountable: Evidence from the modern theory of Central Banking', Journal of Economic Surveys, vol. 14, no. 5, pp. 563-95.
Rodrik, D. (1999), 'Institutions for high-quality growth: What they are and how to acquire them', mimeo, Harvard University.
Rao, M.J.M. (2000), 'Fiscal deficits, interest rates and inflation: Assessment of monetisation strategy’, Economic and Political Weekly, pp. 2637-45, 22 July.
Reserve Bank of India (RBI) (2000), Handbook of Statistics on Indian Economy. RBI, Mumbai.
Romer, D. (2000), 'Keynesian macroeconomics without the LM curve', Journal of Economic Perspectives, vol. 14, no. 2, pp. 149-69.
Romer, D. (1999), 'Short-run fluctuations', August, http://elsa.berkeley.edu/~dromer/index.html.
Sargent, T.J. and N. Wallace (1981), 'Some unpleasant monetarist arithmetic', Quarterly Review of the Federal Reserve Bank of Minneapolis, vol.14, pp. 328-50.
Svensson, L.E.O (2000), 'Open-economy inflation targeting', Journal of International Economics, vol. 50, pp. 155-83.
Taylor, J.B. (ed.) (1999), Monetary Policy Rules, University of Chicago Press for NBER, Chicago, IL.
Taylor, J.B. (2000), 'Alternative views of the monetary transmission mechanism: What difference do they make for monetary policy?', Oxford Review of Economic Policy, vol. 16, no. 4, pp. 60-73.
Varshney, A. (2000), 'Why have poor democracies not eliminated poverty? A suggestion', Asian Survey, vol. 40, no. 5, pp. 718-36.
Whitehead, L. (2000), 'The delicate balance between financial credibility and political accountability: Restructuring monetary authority in new democracies', Second draft of the paper presented at the 18th World Congress of the International Political Science Association, Quebec.
Wren-Lewis, S. (2000), 'The Limits to Discretionary Fiscal Stabilization Policy', Oxford Review of Economic Policy, vol. 16, no. 4, pp. 92-105.