Daviga and Gürkaynak take Blanchard’s argument a step further. They show that in a world of multiple inefficiencies and where the central bank is perceived to be the “residual claimant” of all policy, other policymakers (fiscal authorities in this case) can afford not to sufficiently internalize the welfare effects of their actions and choose socially sub-optimal policies.
Is Optimal Monetary Policy Always Optimal?
Authors: Troy Daviga, Refet S. Gürkaynak
From: Federal Reserve Bank of Kansas City – Bilkent University
