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This paper investigates the conduct of monetary and fiscal policy in the UK in the period of the Bank of England independence and before the start of the quantitative easing. Using a simple DSGE New Keynesian model of non-cooperative monetary and fiscal policy interactions under the fiscal intra-period leadership, the authors demonstrate that the past policy in the UK is better explained as following optimal policy under discretion than under commitment. They estimate policy objectives of both policy makers, and derive implied policy rules.
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