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Interest rate bounds and fiscal policy

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  • Chadha, Jagjit S.
  • Nolan, Charles

Abstract

When the monetary authority controls the short-term interest rate we find that under a regime of permanent (and even persistent but temporary) deficits that a strict upper bound on the feasible interest rate sequence is present. More generally, the satisfaction of the fiscal authority’s present value budget constraint in the presence of a deficit sequence, means that monetary and fiscal decisions cannot be independent. This is an important caveat to the results in McCallum (1984).

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 84 (2004)
Issue (Month): 1 (July)
Pages: 9-15

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Handle: RePEc:eee:ecolet:v:84:y:2004:i:1:p:9-15

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  1. McCallum, Bennett T, 1984. "Are Bond-Financed Deficits Inflationary? A Ricardian Analysis," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 123-35, February.
  2. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
  3. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 1998. "Is the Price Level Determined by the Needs of Fiscal Solvency?," NBER Working Papers 6471, National Bureau of Economic Research, Inc.
  4. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc.
  5. Stephen A. O'Connell & Stephen P. Zeldes, . "Rational Ponzi Games," Rodney L. White Center for Financial Research Working Papers 18-86, Wharton School Rodney L. White Center for Financial Research.
    • O'Connell, Stephen A & Zeldes, Stephen P, 1988. "Rational Ponzi Games," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 431-50, August.
  6. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
  7. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
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Cited by:
  1. Tatiana Damjanovic & Charles Nolan, 2005. "Some Welfare Implications of Optimal Stabilization Policy in an Economy with Capital and Sticky Prices," CDMA Working Paper Series 200509, Centre for Dynamic Macroeconomic Analysis.
  2. Chadha, J.S. & Charles Nolan, 2002. "Optimal Simple Rules for the Conduct of Monetary and Fiscal Policy," Cambridge Working Papers in Economics 0224, Faculty of Economics, University of Cambridge.
  3. Philip Turner, 2013. "Benign neglect of the long-term interest rate," BIS Working Papers 403, Bank for International Settlements.

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