EconPapers    
Economics at your fingertips  
 

Gambling to Preserve Price (and Fiscal) Stability

Giancarlo Corsetti () and Bartosz Maćkowiak
Additional contact information
Giancarlo Corsetti: European University Institute and CEPR

IMF Economic Review, 2024, vol. 72, issue 1, No 2, 32-57

Abstract: Abstract We study a model in which policy aims at aggregate price stability. A fiscal imbalance materializes that, if uncorrected, must cause inflation, but the imbalance may get corrected in the future with some probability. By maintaining price stability in the near term, monetary policy can buy time for a correction to take place. The policy gamble may succeed, preserving price and fiscal stability, or fail, leading to a delayed, possibly large jump in the price level. The resulting dynamics resemble the models of a currency crisis following Krugman (J Money Credit Bank 11:311–325, 1979) and Obstfeld (Am Econ Rev 76: 72–81, 1986). Like in Obstfeld’s work, multiple equilibria arise naturally: whether or not price stability is preserved may depend on private agents’ expectations. The model can be reinterpreted as a model of partial default on public debt, in which case it is reminiscent of Calvo (Am Econ Rev 78:647–661, 1988).

JEL-codes: E31 F31 F41 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1057/s41308-023-00214-x Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Gambling to preserve price (and fiscal) stability (2023) Downloads
Working Paper: Gambling to Preserve Price (and Fiscal) Stability (2023) Downloads
Working Paper: Gambling to Preserve Price (and Fiscal) Stability (2022) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:imfecr:v:72:y:2024:i:1:d:10.1057_s41308-023-00214-x

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/41308/PS2

DOI: 10.1057/s41308-023-00214-x

Access Statistics for this article

More articles in IMF Economic Review from Palgrave Macmillan, International Monetary Fund
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().

 
Page updated 2024-10-13
Handle: RePEc:pal:imfecr:v:72:y:2024:i:1:d:10.1057_s41308-023-00214-x