A nominal income growth target for a conservative ECB? When the policy mix matters

This paper contributes to the goal versus instrument independence debate for the ECB, exploring how alternative monetary arrangements perform when the fiscal authority pursues a strategy of debt reduction in the long term but retains fiscal flexibility in response to supply shocks. If fiscal policy is countercyclical, a constant nominal income growth target should be assigned to a weight-conservative central banker. In fact, as the fiscal authority and the central bank act independently in setting their countercyclical policies, an activist central banker causes excess volatility of inflation. (C) 2003 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved