Nominal targeting in an economy with government debt

Bai, Yuting and Kirsanova, Tatiana and Leith, Campbell (2017) Nominal targeting in an economy with government debt. European Economic Review, 94. pp. 103-125. ISSN 0014-2921

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The fiscal policy environment central banks operate in can be radically different with respect to debt levels, maturity structures and whether or not fiscal adjustments are spendingor tax-based. Despite this, most analyses of monetary policy delegation schemes typically ignore the behavior of the fiscal policy maker. This paper investigates whether delegating either nominal income or price level targets to a monetary authority yields social gains in an economy with government debt, where the fiscal policymaker, acting strategically, may support or undermine the policies of the central bank. We argue that the fiscal environment plays an important role in determining the performance of monetary policy. The gains to price level targeting typically found in the literature can be overturned at empirically relevant debt-to-GDP ratios, when debt stabilization is achieved through spending cuts. In contrast these gains are retained if the fiscal authorities utilize taxes to respond to shocks and stabilize debt.

Item Type:
Journal Article
Journal or Publication Title:
European Economic Review
Additional Information:
This is the author’s version of a work that was accepted for publication in European Economic Review. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in European Economic Review, 94, 2017 DOI: 10.1016/j.euroecorev.2017.02.011
Uncontrolled Keywords:
?? monetary and fiscal policy interactionsprice level targetingnominal income targetingdiscretionary policyfinanceeconomics and econometricse31, e52, e58, e61, c61 ??
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Deposited On:
16 Feb 2017 16:26
Last Modified:
02 May 2024 23:55