Working Paper BETA #2009-30

Download working-paper

Title : Public investment, distortionary taxes and monetary policy transparency.

Author(s) : Meixing Dai, Moïse Sidiropoulos

Abstract : In a two-period model with distortionay taxes and public investment, we re-examine the interaction between monetary policy transparency and fiscal bias. We find that the optimal choices of tax rate and public investment allow eliminating the effects of fiscal bias and hence neutralize the impact of monetary policy opacity (lack of political transparency) on the level and variability of inflation and output, independently of the institutional quality. Our results are robust to alternative specifications of the game between the private sector, the government and the central bank.

Key-words : Central bank transparency, distortionay taxes, public investment, fiscal bias.

JEL Classification : E52, E58, E62, E63, H21, H30.