Economic Models - Convex Optimization

The Advantages of Fiscal Leadership in an Economy 71
Figure 1.
Monetary-Fiscal Interactions and the Central Bank.
absence of changes in information. Thus, the policies and their intended
outcomes will be sustained by the government of the day. 4
2. The Fiscal Leadership Hypothesis
The hypothesis is that the United Kingdom’s improved performance is due
to the fact that the fiscal policy leads an independent monetary policy. This
leadership derives from the fact that fiscal policies typically have long-run
targets (sustainability and low debt), and is not easily reversible (public services
and social equality), and does not stabilize well if efficiency is to be
maintained. Nevertheless, there are also automatic stabilizers in any fiscal
policy framework, implying that monetary policy must condition itself on
the fiscal stance at each point. This automatically puts the latter in a follower’s
role. This is helpful because it allows the economy to secure the benefits
of an independent monetary policy but also enjoys a certain measure
of co-ordination between the two sets of policy makers — discretionary/
automatic fiscal policies on one side, and active monetary policies on the
4 Stackelberg games, with fiscal policy leading, produce fiscal commitment: i.e., sub-game
perfection with either strong or weak time consistency (Basar, 1989). In this sense, we have
“rules rather than discretion”. Commitment to the stabilization policies is then assured by
the independence of the monetary authority.