On (Sub) Optimal Monetary Policy Rules under Untied Fiscal Hands

Zagaglia, Paolo

On (Sub) Optimal Monetary Policy Rules under Untied Fiscal Hands

No 2002:17, Research Papers in Economics from Stockholm University, Department of Economics

Abstract: We examine the interplay between monetary and fiscal policies in a context where disturbances to the public deficit process are a primary source of macroeconomic instability. We perform simulations of optimal targeting rules on a sticky-price model `a la Woodford (1997). Our investigation compares the dynamic adjustment path under inflation targeting with that arising from nominal income growth targeting. When fiscal shocks enter the picture, inflation targeting is a superior strategy. In opposition to Jensen (2002)’s results, we show that an inflation targeter is capable of bringing about the required degree of interest rate inertia. This does not occur at the cost of additional nominal instability.

Keywords: interest rate smoothing; monetary policy rules; fiscal shocks (search for similar items in EconPapers)
JEL-codes: E52 E63 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2002-09-23
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Citations: View citations in EconPapers (14)

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Journal Article: On (Sub)Optimal Monetary Policy Rules under Untied Fiscal Hands (2002)
Working Paper: On (Sub)Optimal Monetary Policy Rules under Untied Fiscal Hands (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:sunrpe:2002_0017

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