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

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

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

Classification and Topics

• 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

Contributors, Places and Time

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

Further information

• Handle: http://hdl.handle.net/10419/19600
• Last update: 10.03.2025, 11:46 AM CET