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Strategic Interactions between an Independent Central Bank and a Myopic Government with Government Debt.

Abstract:

We analyse optimal discretionary games between a benevolent central bank and a myopic government in a New Keynesian model. First, when lump-sum taxes are available and public debt is absent, we show that a Nash game results in too much government spending and excessively high interest rates, while fiscal leadership reinstates the cooperative outcome under discretion. Second, we show that this familiar result breaks down when lump-sum taxes are unavailable. With government debt, the Nash equil...

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Sven Jari Stehn More by this author
David Vines More by this author
Volume:
164
Series:
IMF Working Papers
Publication date:
2008
URN:
uuid:68fa27bc-a658-4dd4-8577-7df5db2316a5
Local pid:
oai:economics.ouls.ox.ac.uk:11985
Language:
English

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