Description
Abstract: How should independent central banks react if pressured by fiscal policymakers? We contrast the implications of two monetary frameworks: one, where the central bank follows a standard rule aiming exclusively at price stability against the other, where monetary policy additionally leans against fiscal influence. The latter rule improves economic outcomes by providing appropriate incentives to the fiscal authority. More importantly, the additional fiscal conditionality can enhance the credibility of the central bank to achieve price stability. We emphasise how the level and structure of government debt emerge as key factors affecting the credibility of monetary policy with fiscal conditionality.