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Central Bank Instruments, Fiscal Policy Regimes, and the Requirements for Equilibrium Determinacy

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  • Andreas Schabert

    (University of Amsterdam)

Abstract

This paper examines the role of the monetary instrument choice for local equilibrium determinacy under sticky prices and different fiscal policy regimes. Corresponding to Benhabib et al.'s (2001) results for interest rate feedback rules, the money growth rate should not rise by more than one for one with inflation when the primary surplus is raised with public debt. Under an exogenous primary surplus, money supply should be accommodating -- such that real balances grow with inflation -- to ensure local equilibrium determinacy. When the central bank links the supply of money to government bonds by controlling the bond-to-money ratio, an inflation stabilizing policy can be implemented for both fiscal policy regimes. Local determinacy is then ensured when the bond-to-money ratio is not extremely sensitive to inflation, or when interest payments on public debt are entirely tax financed, i.e., the budget is balanced. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2006.08.001
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 9 (2006)
Issue (Month): 4 (October)
Pages: 742-762

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Handle: RePEc:red:issued:04-2

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Keywords: Fiscal-monetary policy interaction; Money growth; Bond-to-money ratio; Local equilibrium determinacy;

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References

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Citations

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Cited by:
  1. Ibrahim Chowdhury & Andreas Schabert, 2007. "Federal Reserve Policy viewed through a Money Supply Lens," Working Papers 2007-02, Swiss National Bank.
  2. Auray, Stéphane & Fève, Patrick, 2008. "On the observational (non)equivalence of money growth and interest rate rules," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 801-816, September.
  3. Stefan Niemann & Paul Pichler & Gerhard Sorger, 2010. "Central bank independence and the monetary instrument problem," Economics Discussion Papers 687, University of Essex, Department of Economics.
  4. repec:dgr:uvatin:2008023 is not listed on IDEAS
  5. Schabert, Andreas, 2009. "Money supply, macroeconomic stability, and the implementation of interest rate targets," Journal of Macroeconomics, Elsevier, vol. 31(2), pages 333-344, June.

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