(Optimal) monetary policy with and without debt

Arbeitspapier

We propose a framework of optimal monetary policy where debt sustainability may, or may not, be a relevant constraint for the central bank. We show analytically that in each environment the optimal interest rate path consists of a Taylor rule augmented with forward guidance terms. These terms arise either i) from "twisting interest rates" when the central bank ensures debt sustainability, or ii) under no debt concerns, from committing to keep interest rates low at the exit of the liquidity trap. The optimal policy is isomorphic to Leeper's (1991) "passive monetary/active fiscal policy" regime in the first instance, or "active monetary/passive fiscal policy" regime in the second. We insert our framework into a standard medium scale DSGE model calibrated to the US. Optimal passive monetary policy with debt concerns is ineffective in stabilizing inflation, whereas under no debt concerns, monetary policy is very effective in stabilizing the macroeconomy.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Bank of Canada Staff Working Paper ; No. 2021-5

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Price Level; Inflation; Deflation ; Monetary Policy ; Central Banks and Their Policies ; Fiscal Policy ; Bayesian Analysis: General
• Thema: Monetary policy ; Monetary policy framework ; Fiscal policy ; Economic models

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Chafwehé, Boris ; Oikonomou, Rigas ; Priftis, Romanos ; Vogel, Lukas
• Ereignis: Veröffentlichung
• (wer): Bank of Canada
• (wo): Ottawa
• (wann): 2021

Weitere Informationen

• DOI: doi:10.34989/swp-2021-5
• Handle: http://hdl.handle.net/10419/241228
• Letzte Aktualisierung: 10.03.2025, 11:43 MEZ