Accounting for Credibility: Fiscal-Monetary Interactions and the Credibility of Central Bank Mandates / Luigi Bocola, Gastón Chaumont, Alessandro Dovis, Rishabh Kirpalani.

Format:

Book

Author/Creator:

Bocola, Luigi.

Contributor:

Chaumont, Gastón.

Dovis, Alessandro.

Kirpalani, Rishabh.

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w35691.

NBER working paper series no. w35691

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2026.

Summary:

We develop a model for fiscal and monetary policy determination in the tradition of Sargent and Wallace (1981). Ex-ante, the government has incentives to delegate monetary policy to a central bank with an inflation targeting mandate. Ex-post, however, the government faces temptations to revoke the mandate to generate seigniorage revenues. The likelihood that the government will adhere to its commitment depends on shocks to fiscal fundamentals and the costs of reneging on the mandate. The economy endogenously transitions between a "monetary-dominant" regime where monetary policy adheres to its commitment and a "fiscal-dominant" regime where the fiscal authority interferes with monetary policy. These two regimes sharply differ in their implications for the comovement of inflation and debt-to-GDP ratios. We use the model as a measurement device to interpret the fiscal and monetary history in Colombia, Chile, and the U.S.

Notes:

August 2026.

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