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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;

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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.

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