Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/70757
Authors: 
Kirsanova, Tatiana
Wren-Lewis, Simon
Year of Publication: 
2007
Series/Report no.: 
Working Paper, Federal Reserve Bank of Atlanta 2007-26
Abstract: 
We examine the impact of different degrees of fiscal feedback on debt in an economy with nominal rigidities where monetary policy is optimal. We look at the extent to which different degrees of fiscal feedback enhance or detract from the ability of the monetary authorities to stabilize output and inflation. Using an objective function derived from utility, we find the optimal level of fiscal feedback to be small. A clear discontinuity exists in the behavior of monetary policy and welfare on either side of this optimal level. As the extent of fiscal feedback increases, optimal monetary policy becomes less active because fiscal feedback tends to deflate inflationary shocks. However, this fiscal stabilization is less efficient than monetary policy, so welfare declines. In contrast, if fiscal feedback falls below some critical value, optimal monetary policy becomes strongly passive, and this passive monetary policy leads to a sharp deterioration in welfare.
Subjects: 
fiscal policy
feedback rules
debt
macroeconomic stabilization
JEL: 
E52
E61
E63
F41
Document Type: 
Working Paper

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