DEBT STABILISATION BIAS AND THE TAYLOR PRINCIPLE: OPTIMAL POLICY IN A NEW KEYNESIAN MODEL WITH GOVERNMENT DEBT AND INFLATION PERSISTENCE

Svan Jari Stehn and David Vines

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: Leith and Wren-Lewis (2007) have shown that government debt is returned to its pre-shock level in a New Keynesian model under optimal discretionary policy. This has two important implications for monetary and fiscal policy. First, in a high-debt economy, it may be optimal for discretionary monetary policy to cut the interest rate in response to a cost-push shock - thereby violating the Taylor principle - although this will not be true if inflation is significantly persistent. Second, the optimal fiscal response to such a shock is more active under discretion than commitment, whatever the degree of inflation persistence.

JEL-codes: E52 E60 E61 E63 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2007-10
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Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Debt Stabilization Bias and the Taylor Principle: Optimal Policy in a New Keynesian Model with Government Debt and Inflation Persistence (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2007-22

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