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Low Nominal Interest Rates: A Public Finance Perspective

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  • Noritaka Kudoh

    (Hokkaido University)

Abstract

This paper studies low-interest-rate policies from a public finance perspective. Two policy regimes are considered. In the first regime, the central bank is subordinate and its budget is integrated into the fiscal authority's budget constraint. In this case, monetary policy influences the revenue mainly through currency seigniorage. In the other regime, the central bank's budget is separated from that of the fiscal authority. Commitment to a low nominal interest rate forces the central bank to inject money when the primary deficit increases. Thus, even if the budgets are separated, the central bank's actions are constrained by the fiscal authority. Under a "passive" Taylor rule, a reduction in the nominal interest rate lowers the government revenue.

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 3 (2007)
Issue (Month): 2 (June)
Pages: 61-93

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Handle: RePEc:ijc:ijcjou:y:2007:q:2:a:3

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Cited by:
  1. Rangan Gupta & Lardo Stander, 2014. "Endogenous Fluctuations in an Endogenous Growth Model with Inflation Targeting," Working Papers 201432, University of Pretoria, Department of Economics.
  2. Noritaka Kudoh & Hong Thang Nguyen, 2011. "Taylor rules and the effects of debt-financed fiscal policy in a monetary growth model," Economics Bulletin, AccessEcon, vol. 31(3), pages 2480-2490.
  3. Panagiotis Chronis & Aspassia Strantzalou, 2008. "Monetary and Fiscal Policy Interaction: What is the Role of the Transaction Cost of the Tax System in Stabilisation Policies?," Working Papers 71, Bank of Greece.

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