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Gradualism in monetary policy and fiscal equilibrium

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Author Info

  • Helder Ferreira de Mendonça
  • Manoel Carlos de Castro Pires

Abstract

Purpose – This paper aims to study a monetary policy problem, where concerns with price stability and with the impact of interest rates on public debt are simultaneously addressed. Design/methodology/approach – The problem is analytically approached under a new Keynesian monetary policy framework to which a budget constraint is added and, subsequently, the model's implications are empirically illustrated by characterizing Brazilian policies. Findings – The findings denote the existence of a trade-off between inflation target and public debt stability. Therefore the determination of an inflation target cannot neglect this trade-off. Furthermore, the empirical analysis from the Brazilian case shows that the Central Bank of Brazil takes into consideration public debt when determining the interest rate. Practical implications – The determination of the interest rate in an inflation targeting regime must consider the public debt stability. Originality/value – This paper makes a contribution on the theme of consistency between monetary policy and fiscal equilibrium.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Journal of Economic Studies.

Volume (Year): 37 (2010)
Issue (Month): 3 (September)
Pages: 327-342

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Handle: RePEc:eme:jespps:v:37:y:2010:i:3:p:327-342

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Related research

Keywords: Inflation; Interest rates; Monetary policy; National debt;

References

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  1. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  2. Muscatelli, V. Anton & Tirelli, Patrizio & Trecroci, Carmine, 2004. "Fiscal and monetary policy interactions: Empirical evidence and optimal policy using a structural New-Keynesian model," Journal of Macroeconomics, Elsevier, vol. 26(2), pages 257-280, June.
  3. Favero, Carlo A., 2004. "Comments on "Fiscal and monetary policy interactions: Empirical evidence on optimal policy using a structural new-Keynesian model"," Journal of Macroeconomics, Elsevier, vol. 26(2), pages 281-285, June.
  4. Bohn, H., 1991. "Budget Deficits and Government Accounting," Weiss Center Working Papers 28-91, Wharton School - Weiss Center for International Financial Research.
  5. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  6. Marvin Goodfriend, 1990. "Interest rates and the conduct of monetary policy," Working Paper 90-06, Federal Reserve Bank of Richmond.
  7. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  8. Philip Lowe & Luci Ellis, 1997. "The Smoothing of Official Interest Rates," RBA Annual Conference Volume, in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia.
  9. Sack, Brian, 2000. "Does the fed act gradually? A VAR analysis," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 229-256, August.
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Citations

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Cited by:
  1. Helder de Mendonca, 2007. "Towards credibility from inflation targeting: the Brazilian experience," Applied Economics, Taylor & Francis Journals, vol. 39(20), pages 2599-2615.
  2. Helder Ferreira de Mendonça, 2009. "Output-inflation and unemployment-inflation trade-offs under inflation targeting: Evidence from Brazil," Journal of Economic Studies, Emerald Group Publishing, vol. 36(1), pages 66-82, January.
  3. Helder Ferreira de Mendonça & José Simão Filho, 2007. "Economic transparency and effectiveness of monetary policy," Journal of Economic Studies, Emerald Group Publishing, vol. 34(6), pages 497-514, November.

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