English, Article, Journal or magazine article edition: Optimal Fiscal Feedback on Debt in an Economy with Nominal Rigidities Tatiana Kirsanova; Simon Wren-Lewis

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Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Optimal Fiscal Feedback on Debt in an Economy with Nominal Rigidities
Author
  • Tatiana Kirsanova
  • Simon Wren-Lewis
Physical Description
  • preprint
Notes
  • RePEc:san:cdmacp:0609
  • 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.
  • RePEc:fip:fedawp:2007-26
  • 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 enhances or detracts from the ability of the monetary authorities to stabilise output and inflation. Using an objective function derived from utility, we find the optimal level of fiscal feedback to be small. There is a clear discontinuity in the behaviour of monetary policy and welfare 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 stabilisation is less efficient than monetary policy, and so welfare declines. In contrast, if fiscal feedback falls below some critical value, either the model becomes indeterminate, or optimal monetary policy becomes strongly passive, and this passive monetary policy leads to a sharp deterioration in welfare.
  • Fiscal Policy, Feedback Rules, Debt, Macroeconomic Stabilisation
  • RePEc:oxf:wpaper:306
Language
  • English
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