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Low Nominal Interest Rates: A Public Finance Perspective

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Author Info
Noritaka Kudoh (Hokkaido University)

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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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Publisher 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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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management

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  1. 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. [Downloadable!]
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