Degree of Policy Precommitment in the UK: An Empirical Investigation of Monetary and Fiscal Policy Interactions

Paper number: 11/08

Year: 2011

Paper Category: Discussion Paper

Authors

Tatiana Kirsanova  (University of Exeter)
Stephanus le Roux (Department for Work and Pensions)

Abstract

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 we demonstrate that the past policy in the UK is better explained as following optimal policy under discretion than under commitment. We estimate policy objectives of both policy makers, and derive implied policy rules.

Key Words: Monetary and Fiscal Policy, Commitment, Discretion, Macroeconomic Stabilisation, Bayesian Estimation

JEL Reference Number: E52, E61, E63

Degree of Policy Precommitment in the UK: An Empirical Investigation of Monetary and Fiscal Policy Interactions Degree of Policy Precommitment in the UK: An Empirical Investigation of Monetary and Fiscal Policy Interactions