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Simple monetary rules under fiscal dominance

This paper asks whether interest rate rules that respond aggressively to inflation, following the Taylor principle, are feasible in countries that suffer from fiscal dominance. We find that if interest rates are allowed to also respond to government debt, they can produce unique equilibria. But such equilibria are associated with extremely volatile inflation. The resulting frequent violations of the zero lower bound make such rules infeasible. Even within the set of feasible rules the welfare optimizing response to inflation is highly negative. The welfare gain from responding to government debt is minimal compared to the gain from eliminating fiscal dominance.Printed journal

Ketersediaan

Call NumberLocationAvailable
PSB lt.dasar - Pascasarjana1
Penerbit American Finance Association.,
Edisi -
Subjek Monetary policy
Inflation
Interest rates
Economic models
Equilibrium
Deficit financing
studies
ISBN/ISSN 222879
Klasifikasi -
Deskripsi Fisik -
Info Detail Spesifik -
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