Simple Monetary Rules under Fiscal Dominance

Michael Kumhof, Ricardo Nunes and Irina Yakadina

Journal of Money, Credit and Banking, 2010, vol. 42, issue 1, 63-92

Abstract: This paper asks whether interest rate rules that respond aggressively to inflation, following the Taylor principle, are feasible in countries that suffer from fiscal dominance. We find that if interest rates are allowed to also respond to government debt, they can produce unique equilibria. But such equilibria are associated with extremely volatile inflation. The resulting frequent violations of the zero lower bound make such rules infeasible. Even within the set of feasible rules the welfare optimizing response to inflation is highly negative. The welfare gain from responding to government debt is minimal compared to the gain from eliminating fiscal dominance. Copyright (c) 2010 The Ohio State University No claim to original US government works.

Date: 2010
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Related works:
Journal Article: Simple Monetary Rules under Fiscal Dominance (2010)
Working Paper: Simple monetary rules under fiscal dominance (2008)
Working Paper: Simple Monetary Rules Under Fiscal Dominance (2007)
Working Paper: Simple Monetary Rules under Fiscal Dominance (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:42:y:2010:i:1:p:63-92

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