Navigating by Falling Stars: Monetary Policy with Fiscally Driven Natural Rates

Rodolfo Campos, Fernández-Villaverde, Jesús, Nuño, Galo and Peter Paz
Authors registered in the RePEc Author Service: Jesus Fernandez-Villaverde

No 18874, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study a new type of monetary-fiscal interaction in a heterogeneous-agent New Keynesian model with a fiscal block. Due to household heterogeneity, the stock of public debt affects the natural interest rate, forcing the central bank to adapt its monetary policy rule to the fiscal stance to guarantee that inflation remains at its target. There is, however, a minimum level of debt below which the steady-state inflation deviates from its target due to the zero lower bound on nominal rates. We analyze the response to a debt-financed fiscal expansion and quantify the impact of different timings in the adaptation of the monetary policy rule, as well as the performance of alternative monetary policy rules that do not require an assessment of the natural rates. We validate our findings with a series of empirical estimates.

JEL-codes: E32 E58 E63 (search for similar items in EconPapers)
Date: 2024-03
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP18874 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Navigating by Falling Stars: Monetary Policy with Fiscally Driven Natural Rates (2024)
Working Paper: Navigating by falling stars: monetary policy with fiscally driven natural rates (2024)
Working Paper: Navigating by Falling Stars: Monetary Policy with Fiscally Driven Natural Rates (2024)
Working Paper: Navigating by Falling Stars:Monetary Policy with Fiscally Driven Natural Rates (2024)
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:cpr:ceprdp:18874

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP18874

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().