COSTS OF SEPARATING BUDGETARY POLICY FROM CONTROL OF INFLATION - A NEGLECTED ASPECT OF CENTRAL BANK INDEPENDENCE

We investigate the importance of co-ordinating monetary and fiscal pol icy in a fully dynamic model. The monetary authority seeks to control inflation while the fiscal authority has a budgetary target. We invest igate the resulting Nash equilibrium and the consequences of a period of learning which may arise if each authority is not ex ante sure of t he responses of the other. Both of these impact considerably on the ou tcome and indicate that there may be considerable costs to separating monetary and fiscal policy.