Designing Macroeconomic Frameworks: A Positive Analysis of Monetary and Fiscal Delegation*

This paper proposes a simple model illustrating the potential benefits of approaching the design of a macroeconomic framework conducive to low inflation in both its monetary and fiscal dimensions rather than relying exclusively on the merits of central bank independence and other monetary commitment devices such as currency boards or dollarization. The reason is that monetary delegation alone merely ‘relocates’ the time-inconsistency problem stemming from the government's incentive to address structural output shortfall with a macroeconomic stimulus. This paper also provides a new argument explaining why fiscal deficit rules may be less effective than instrument-specific rules.