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Interest Rate Bounds and Fiscal Policy

Jagjit Chadha () and Charles Nolan ()

No 200401, CDMA Working Paper Series from Centre for Dynamic Macroeconomic Analysis

Abstract: When the monetary authority controls the short-term interest rate we find that under a regime of permanent (and even persistent but temporary) deficits that a strict upper bound on the feasible interest rate sequence is present. More generally, the satisfaction of the fiscal authority’s present value budget constraint in the presence of a deficit sequence, means that monetary and fiscal decisions cannot be independent. This is an important caveat to the results in McCallum (1984).

Keywords: Intertemporal macro; monetary policy and fiscal policy interactions. (search for similar items in EconPapers)
JEL-codes: E63 E52 E31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2004-10-15
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