The Choice of Monetary Regime

Finn Østrup
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Finn Østrup: Department of Finance, Copenhagen Business School, Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark

No 2005-2, Working Papers from Copenhagen Business School, Department of Finance

Abstract: The article examines how government spending is determined in a closed economy where the nominal wage is pre-set through contracts and the wage setters have perfect foresight regarding subsequent policy decisions. The monetary regime affects government spending because: (i) with a pre-set nominal wage, a given change in government spending has different effects on employment and inflation under different monetary regimes, and (ii) the authorities’ inclination to expand government spending is affected by the inflation rate which depends on the monetary regime. If the costs related to inflation are high, a comparison between monetary regimes suggests that welfare is highest under nominal income targeting where the nominal income target is determined to bring about price stability.

Keywords: Monetary regimes; fiscal policy; monetary non-neutrality (search for similar items in EconPapers)
JEL-codes: E42 E61 E62 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2006-06-27
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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