Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/148110
Authors: 
Gnocchi, Stefano
Lambertini, Luisa
Year of Publication: 
2016
Series/Report no.: 
Bank of Canada Staff Working Paper 2016-3
Abstract: 
We analyze the interaction between committed monetary policy and discretionary fiscal policy in a model with public debt, endogenous government expenditures, distortive taxation and nominal rigidities. Fiscal decisions lack commitment but are Markovperfect. Monetary commitment to an interest rate path leads to a unique level of debt. This level of debt is positive if the central bank adopts closed-loop strategies that raise the real interest rate when inflation is above target owing to fiscal deviations. More aggressive defence of the inflation target implies lower debt and higher welfare. Simple Taylor-type interest rate rules achieve welfare levels similar to those generated by sophisticated closed-loop strategies.
Subjects: 
Credibility
Fiscal policy
Inflation targets
Monetary policy framework
JEL: 
E24
E32
E52
Document Type: 
Working Paper

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