High Trend Inflation and Passive Monetary Detours

Guido Ascari, Anna Florio and Alessandro Gobbi ()
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Alessandro Gobbi: Department of Economics and Management, University of Pavia

No 135, DEM Working Papers Series from University of Pavia, Department of Economics and Management

Abstract: According to the long-run Taylor principle (Davig and Leeper, 2007), a central bank can deviate to a passive monetary policy and still obtain determinacy if a sufficiently aggressive monetary policy is expected for the future. Does this principle hold true when both monetary and fiscal policies can switch and there is positive trend inflation? We find that passive monetary detours are no longer possible when trend inflation is high, whatever fiscal policy is in place. This has important policy implications in terms of flexibility and monetary-fiscal authorities coordination.

Keywords: trend inflation; monetary-fiscal policy interactions; Markov-switching; determinacy (search for similar items in EconPapers)
JEL-codes: E5 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2017-03
New Economics Papers: this item is included in nep-mac and nep-mon
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http://dem-web.unipv.it/web/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0135.pdf (application/pdf)

Related works:
Journal Article: High trend inflation and passive monetary detours (2018)
Working Paper: High trend inflation and passive monetary detours (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:pav:demwpp:demwp0135

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