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Some Fiscal Implications of Monetary Policy

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Author Info
Harris Dellas (University of Bern)
Kevin D. Salyer (University of California, Davis)

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Abstract

We study the implications of alternative monetary targeting procedures for real interest rates and economic activity. We find that countercyclical monetary policy rules lead to higher real interest rates, higher average tax rates, lower output but lower variability of tax rates and consumption relative to procyclical rules. For a country with a high level of public debt (e.g. Italy), the adoption of a countercyclical procedure such as interest rate pegging may conceivably raise public debt servicing costs by more than half a percentage point of GNP. Our analysis suggests that the current debate on the targeting procedures of the European Central Bank ought to be broadened to include a discussion of the fiscal implications of monetary policy. Copyright Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research 2003

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Article provided by Blackwell Publishing in its journal Bulletin of Economic Research.

Volume (Year): 55 (2003)
Issue (Month): 1 (January)
Pages: 21-36
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Handle: RePEc:bla:buecrs:v:55:y:2003:i:1:p:21-36

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359. [Downloadable!] (restricted)
  2. Woodford, Michael, 1990. "The optimum quantity of money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 20, pages 1067-1152 Elsevier. [Downloadable!] (restricted)
  3. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September. [Downloadable!] (restricted)
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  4. Greenwood, Jeremy & Huffman, Gregory W., 1987. "A dynamic equilibrium model of inflation and unemployment," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 203-228, March. [Downloadable!] (restricted)
  5. V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1991. "Optimal fiscal and monetary policy: some recent results," Staff Report 147, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  6. Pu Shen, 1998. "How important is the inflation risk premium?," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 35-47. [Downloadable!]
  7. Orphanides, Athanasios & Solow, Robert M., 1990. "Money, inflation and growth," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 6, pages 223-261 Elsevier. [Downloadable!] (restricted)
  8. Bernheim, B Douglas, 1991. "Optimal Fiscal and Monetary Policy: Some Recent Results," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 540-42, August. [Downloadable!] (restricted)
  9. Aschauer, David & Greenwood, Jeremy, 1983. "A Further Exploration in the Theory of Exchange Rate Regimes," Journal of Political Economy, University of Chicago Press, vol. 91(5), pages 868-75, October. [Downloadable!] (restricted)
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  1. Jorda, Oscar & Salyer, Kevin, 2001. "The Response of Term Rates to Monetary Policy Uncertainty," Working Papers 01-6, University of California at Davis, Department of Economics. [Downloadable!]
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