Central bank Instruments, Fiscal Policy Regimes, and the Requirements for Equilibrium Determinacy

Andreas Schabert

Working Papers from Business School - Economics, University of Glasgow

Abstract: In this paper we examine the local determinacy conditions for three monetary policy regimes in a business cycle model with staggered price setting. The central bank either controls the nominal interest rate, the money growth rate, or it conducts open market operations and controls the bond-to-money ratio herein. All instruments are set contingent on changes in current inflation. For the first two cases, equilibrium determinacy imposes strong restrictions on the endogenous response to changes in inflation, which depend on whether fiscal policy is Ricardian or non-Ricardian. In the case of open market policy, Ricardian equivalence does not hold and government solvency is guaranteed for finite bond-to- money ratios. The central bank can ensure determinacy by setting the latter not in an extremely reactive way. The equilibrium sequence of real financial wealth then exerts a stabilizing impact on prices and real activity such that equilibrium multiplicity as well as explosiveness is ruled out.

JEL-codes: E32 E52 E63 (search for similar items in EconPapers)
Date: 2003-01
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.gla.ac.uk/media/media_22234_en.pdf (application/pdf)

Related works:
Journal Article: Central Bank Instruments, Fiscal Policy Regimes, and the Requirements for Equilibrium Determinacy (2006)
Working Paper: Central Bank Instruments, Fiscal Policy Regimes, and the Requirements for Equilibrium Determinacy (2006)
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:gla:glaewp:2003_5

Access Statistics for this paper

More papers in Working Papers from Business School - Economics, University of Glasgow Contact information at EDIRC.
Bibliographic data for series maintained by Business School Research Team ().