Fiscal Requirements for Price Stability

Michael Woodford

No 8072, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper argues that maintaining price stability requires not only commitment to an appropriate monetary policy rule, but an appropriate fiscal policy rule as well. 'Ricardian equivalence' does not imply that fiscal policy is irrelevant, except in the case of a certain class of policies (called 'Ricardian' policies). The role of fiscal developments in inflation determination under a non-Ricardian regime is illustrated through an analysis of the U.S. bond-price support regime of the 1940s. Several recent theoretical challenges to the logical possibility of a non-Ricardian regime are addressed, and a number of consequences are then drawn for the choice of policies to ensure price stability. An example of a monetary-fiscal regime with attractive properties would combine a 'Taylor rule' for monetary policy with nominal-deficit targeting as a fiscal policy commitment.

JEL-codes: E31 E42 (search for similar items in EconPapers)
Date: 2001-01
Note: EFG ME
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Citations: View citations in EconPapers (587)

Published as Woodford, Michael. "Fiscal Requirements For Price Stability," Journal of Money, Credit and Banking, 2001, v33(3,Aug), 669-728.

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