Q2. Why does a monetary policy suffer from an inflation bias?
Discretionary monetary policymaking suffers from an inflation bias because the price stability weight o f the CCB coincides with that o f society.
Q3. What is the loss function of society i?
In particular, the loss function o f society i is defined over inflation, output and public spending:V s,i = ‘A The author, 2,, Ps- [a„s tt,2 + (x^-x,)2 + a gS (g,,-gt)2], 0<PS<1, a„s,agS>Q|2.2)
Q4. What is the weight of the CCB to output in country i?
The weight the CCB attaches to output in country i is only 1/n-th o f the weight that a national central bank would attach to output i f monetarypolicy would be set at the national rather than the union level.
Q5. What is the effect of a unilateral cut in the tax rate?
the inflation-reducing effect o f a unilateral cut in the tax rate r, is only 1/n-th o f the corresponding effect under national monetary policymaking.
Q6. What is the argument that the CCB has a first-mover advantage?
Sometimes it is argued that the fiscal authority has a first-mover advantage vis-à-vis the central bank (e.g. Debelle and Fischer, 1994), because fiscal policy cannot be changed instantaneously (while monetary policy can).
Q7. What is the way to achieve the Pareto optimum?
In the absence o f political distortions, an optimally designed conservative, independent central bank can reach the second best (i.e. the Pareto optimum in the absence o f lump-sum taxes).
Q8. Why do the authors omit the country' index?
The authors omit the country' index because now the inflation rate is selected at the national level, while each country's policymaker faces the same optimization problem.
Q9. What is the effect of monetary distortions on the economy?
The monetary distortions cause monetary unification to boost debt accumulation while the fiscal distortions imply that this additional debt accumulation is excessive.
Q10. How does the paper address the dynamic interactions between monetary and fiscal policy in a closed economy?
Employing a model in the tradition o f Barro and Gordon (1983) to incorporate commitment problems, the authors extend these dynamic models o f discretionary policymaking to a monetary union with several fiscal policymakers.
Q11. What is the objective function of the CCB?
I f a„M=a„s and a gM= agS,5 the objective function o f the CCB corresponds to an equally weighted average o f the individual societies’ objective functions.
Q12. What is the equilibrium in the absence of lump-sum taxes?
Eu rope anU nive rsity Inst itute .D igiti sed vers ion prod uced by the EUI L ibra ryin 202 0.A vaila ble Ope nAc cess on Cad mus , Eur opea nU nive rsity Inst itute Res earc hR epos itoThe second best equilibrium is the Pareto optimum in the absence o f lump-sum taxes.
Q13. What is the effect of a monetary policy in the absence of myopic governments?
monetary institutions can no longer be targetted only at the optimal inflation rate but also must bear the burden o f dealing with the political distortions due to myopic governments.
Q14. What is the effect of short election cycles and political instability on the effective rate of government debt?
short election cycles and political instability may make governments rather myopic, which raises the effective rate at which they discount future events.