1. Strategic Interaction between Fiscal and Monetary Policies in an Export-Oriented Economy Sergey Merzlyakov Junior Research Fellow of the Laboratory for Macroeconomic Analysis National Research University Higher School of Economics, Moscow

2. Motivation Literature on Fiscal and Monetary Policy Interaction Model Strategic Interaction Conclusion Contents

3. Motivation Why strategic interaction?  Complementary policy instruments  Joint constraint Peculiarity of macroeconomic development in an export-oriented economy Optimal macroeconomic policy design  Central bank independence: do we really need it?

4. Fiscal and monetary policy interaction: Christ (1979), Sargent and Wallace (1981), Blinder (1982) Strategic complementarity instruments: Andersen and Schneider (1986), Dixit and Lambertini (2003) New political economy in macroeconomics setup: Drazen (2000), Persson and Tabellini (2000) Literature review

5. Two-period model Key points Endogenous variables: Predetermined variables: all variables in period 0 Policy variables:  Fiscal policy  Discretionary policy (lump-sum taxes, government expenditure)  Automatic stabilizers (taxes that depend on export and output)  Stabilization fund (as the sterilization mechanism of excessive money)  Monetary policy  The only transmission monetary channel is foreign currency operations  Exchange rate target  Export and import depend on exchange rate  By changing the international reserves, the central bank changes the supply of money

6.  Phillips Curve  Aggregate Demand  Government Budget Constraint  Balance of Payment  Foreign Exchange Market Operations  Real Exchange Rate  Money in Circulation Model  Social Loss Function

7. Forms of strategic interaction The government loss: The central bank loss:  Dependent central bank: fiscal and monetary policy coordination  Independent central bank:  Stackelberg interaction with the government leadership  Cournot interaction (central bank and government do not take each others’ actions into account when choosing their policies)

8.  What is the optimal bargaining power of the government relative to the central bank? Coordination: the loss function

9.  Coordination is effective only if the bargaining power of the central bank is relatively large Coordination: the bargaining power 0,000118 0,005045 0,010 0,099 0,986 0,0 0,2 0,4 0,6 0,8 1,0 1,2 0,010,5110100 Bargaining power 0,00000 0,00002 0,00004 0,00006 0,00008 0,00010 0,00012 0,00014 0,00016 0,00018 0,00020 Government and central bank lossSocial loss

10.  Agents’ losses are sensitive to fiscal policy Central bank independence: agents’ losses

11. Conclusion  In an export-oriented economy the independence of the central bank does not play a significant role  Coordination is preferable if the bargaining power of the central bank is relatively large  Interaction with the government leadership is preferable if the output is government priority  Next: to compare different monetary policy regimes (exchange rate target vs. growth rate of money target), to analyze other forms of strategic interaction (the central bank leadership)

12. Thank you for your attention!