Montserrat Ferré and Carolina Manzano
Mercer University and Universitat Rovira i Virgili
In this article we extend the rational partisan model of Alesina and Gatti (1995) to include a second policy, fiscal policy, besides monetary policy. It is shown that the extent to which an independent central bank is successful in attaining price stability depends on the degree of conservativeness of the central bank in relation to the political parties and the private sector's expectations on which party will win the elections. In addition, the inclusion of fiscal policy in Alesina and Gatti's model implies that uncertainty about the course of policy is not a sufficient factor to ensure that, when supply shocks are not relevant, independent central banks bring about low inflation at no real cost.
JEL Codes: E58, E63
Full article (PDF, 54 pages, 484 kb)