Distortionary fiscal policy and monetary policy goals

- We reconsider the role of inflation conservatism.
- We study a setting with endogenous fiscal policy and distortionary taxation.
- And we compare a simultaneous policy regime to a fiscal leadership regime.
- Full inflation conservatism is optimal only in the case of fiscal leadership.

We reconsider the role of an inflation conservative central banker in a setting with distortionary taxation. To do so, we assume monetary and fiscal policy are decided by independent authorities that do not abide to past commitments. If the two authorities make policy decisions simultaneously, inflation conservatism causes fiscal overspending. But if fiscal policy is determined before monetary policy, inflation conservatism imposes fiscal discipline. These results clarify that in our setting the value of inflation conservatism depends crucially on the timing of policy decisions.