Arbeitspapier

Active monetary policy, passive fiscal policy and the value of public debt: some further monetarist arithmetic

We consider the properties of two monetary policy rules ("strict inflation targeting", "constant money growth rule") in an intertemporal equilibrium model with flexible prices in which monetary policy is "active", while fiscal policy is "passive". Specifically, we assume that the fiscal agent takes the monetary policy rule as given and restricts itself to a policy which is consistent with a sustainable debt burden and stable steady-state dynamics. The paper shows that dynamic properties of the model economy may differ significantly between the two monetary policy rules if public debt is issued in nominal terms. Under a constant money growth rule which allows for temporary deviations of inflation from target in response to shocks there is scope for revaluations of public debt, acting as automatic stabilizers of government debt dynamics. By contrast, a policy of strict inflation targeting implements the target inflation rate also outside the steady state and precludes thereby such stabilizing revaluations. Owing to this feature, additional fiscal restraint may be needed which is not required under a constant money growth rule.

Language
Englisch

Bibliographic citation
Series: Discussion Paper Series 1 ; No. 2003,12

Classification
Wirtschaft
National Deficit; Surplus
Monetary Policy
Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
Subject
Monetary policy
Fiscal regimes
Overlapping generations
Geldpolitik
Inflation Targeting
Geldmengensteuerung
Finanzpolitik
Steady-State-Wachstum
Overlapping Generations
Intertemporales Gleichgewicht
Öffentliche Schulden
Theorie

Event
Geistige Schöpfung
(who)
von Thadden, Leopold
Event
Veröffentlichung
(who)
Deutsche Bundesbank
(where)
Frankfurt a. M.
(when)
2003

Handle
Last update
10.03.2025, 11:46 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • von Thadden, Leopold
  • Deutsche Bundesbank

Time of origin

  • 2003

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