Policy Games and the Optimal Design of Central Banks

Abstract

This article studies the impact of alternative institutional configurations on economic performance when there is strategic interaction between the government and the central bank. The interaction between the fiscal and monetary authorities is modeled as a non-cooperative two-stage game. The institutions within which monetary and fiscal policies are implemented are represented by the degree of central bank independence, the degree of central bank conservatism, and the relative timing of fiscal and monetary policies. The four representative regimes considered capture the distinguishing features of monetary institutions in the United States, Switzerland, the European Union, and the United Kingdom.