Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/281773 
Year of Publication: 
2024
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 2/2024
Publisher: 
Bank of Finland, Helsinki
Abstract: 
This paper studies price stability and debt sustainability when the real rate exceeds trend growth (r > g) in a New Keynesian model with endogenous technology growth through R&D. Under debt-stabilizing ("passive") fiscal policy the Taylor principle is not sufficient for determinacy. Instead, monetary policy should at least aim to raise r − g with persistent inflation in order to stabilize the expectations of households, firms and innovators. Endogenous growth provides a self-financing mechanism for deficits under active fiscal policy; growth provides some backing for the public debt, which reduces the need for debt-stabilizing inflation when current fiscal deficits are not backed by future fiscal surpluses. Because growth creates some fiscal space, a monetary policy that adheres to the Taylor principle combined with active fiscal policy can yield a unique stable equilibrium, provided that the policy permits r−g to fall with inflation.
Subjects: 
Public Debt
Inflation
Monetary-Fiscal Interaction
Fiscal Theory of the Price Level
Endogenous Growth
JEL: 
E31
E52
E62
E24
O42
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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