Fiscal Disciplining Effect Of Central Bank Opacity: Stackelberg Versus Nash Equilibrium
In a Stackelberg equilibrium, central bank opacity has a fiscal disciplining effect in the sense that it induces the government to reduce taxes and public expenditures, leading hence to lower inflation and output distortions. This effect could disappear or be dominated by the direct effect of opacity when the fiscal and monetary authorities play a Nash game. Central bank transparency is usually studied in a game framework focusing on the interactions between the monetary authority and the private sector. Departing from this approach, several studies introduce monetary and fiscal interactions.