Can conservatism be counterproductive? Delegation and fiscal policy in a monetary union

This paper studies central bank independence in a model of a monetary union where fiscal policies remain the responsibility of national governments and generate externalities, Governments may either coordinate fiscal policy or not, and three forms of delegation are considered: Rogoff-type 'weight independence', inflation targets and linear inflation contracts. The key results are as follows. Under fiscal coordination, 'conservatism' holds and targets (or contracts) outperform 'weight independence'. Without fiscal coordination,'anti-conservatism' may be optimal when fiscal spillovers are negattive, as it reduces governments' activism; and 'weight independence' is restored, since it can alleviate distortions in shock stabilization.