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Title:The advantage of flexible targeting rules PDF Logo
Authors:Ferrero, Andrea
Issue Date:2008
Series/Report no.:Staff Report, Federal Reserve Bank of New York 339
Abstract:This paper investigates the consequences of debt stabilization for inflation targeting. If the monetary authority perfectly stabilizes inflation while the fiscal authority holds constant the real value of debt at maturity, the equilibrium dynamics might be indeterminate. However, determinacy can be restored by committing to targeting rules for either monetary or fiscal policy that include a concern for stabilization of the output gap. In solving the indeterminacy problem, flexible inflation targeting appears to be more robust than flexible debt targeting to alternative parameter configurations and steady-state fiscal stances. Conversely, flexible fiscal targeting rules lead to more desirable welfare outcomes. The paper further shows that if considerations beyond stabilization call for a combination of strict inflation and debt targeting rules, the indeterminacy result can be overturned if the fiscal authority commits to holding constant debt net of interest rate spending.
Subjects:Interaction of fiscal and monetary policy
equilibrium determinacy
JEL:E61
E63
Document Type:Working Paper
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

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