Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/211988 
Authors: 
Year of Publication: 
2004
Series/Report no.: 
Bank of Finland Discussion Papers No. 20/2004
Publisher: 
Bank of Finland, Helsinki
Abstract: 
In this paper we analyse the monetary impact of alternative fiscal policy rules using the debt and deficit, both mentioned as measures of fiscal policy performance in the Stability and Growth Pact (SGP).We use a New Keynesian model, with endogenous labour supply, distortionary taxation and no private capital.The economy is hit by two fundamental shocks: demand and supply shocks, which are orthogonal to each other.Monetary policy is conducted by an independent central bank that will optimise.Under discretionary monetary policy the size of the inflation bias depends on the fiscal policy regime.Using the timeless perspetive approach to precommitment, output persistence increase compared to the discretionary case.The result holds with the alternative fiscal policy rules, and inflation and output persistence reflects the economic data.With the deficit rules, the autocorrelation of the tax rate is near unity irrespective of the monetary policy regime, and irrespective of the fiscal policy parameters and targets.
Subjects: 
inflation
optimal monetary policy
fiscal policy
policy coordination
JEL: 
E52
E31
E61
E62
Persistent Identifier of the first edition: 
ISBN: 
952-462-158-4
Document Type: 
Working Paper

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