Inflation Dynamics: The Role of Public Debt and Policy Regimes

Saroj Bhattarai, Jae Won Lee and Woong Yong Park

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We investigate the roles of a time-varying inflation target and monetary and fiscal policy stances on the dynamics of inflation in a DSGE model. Under an active monetary and passive fiscal policy regime, inflation closely follows the path of the inflation target and a stronger reaction of monetary policy to inflation decreases the response of inflation to non-policy shocks. In sharp contrast, under an active fiscal and passive monetary policy regime, inflation moves in an opposite direction from the inflation target and a stronger reaction of monetary policy to inflation increases the response of inflation to non-policy shocks. Moreover, a higher level of government debt leads to a greater response of inflation while a weaker response of fiscal policy to debt decreases the response of inflation to non-policy shocks. These results are due to variation in the value of public debt that leads to wealth effects on households. Finally, under a passive monetary and passive fiscal policy regime, both monetary and fiscal policy parameters matter for inflation dynamics, but because of equilibrium indeterminacy, theory provides no clear answer on the overall behavior of inflation. We characterize these results analytically in a simple model and numerically in a quantitative model.

Keywords: Time-varying inflation target; Inflation response; Public debt; Monetary and fiscal policy regimes; Monetary and fiscal policy stances; DSGE model (search for similar items in EconPapers)
JEL-codes: E31 E52 E63 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2013-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Inflation dynamics: The role of public debt and policy regimes (2014)
Working Paper: Inflation Dynamics: The Role of Public Debt and Policy Regimes (2013)
Working Paper: Inflation dynamics: the role of public debt and policy regimes (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2013-75

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