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Fiscal Policy and Optimal Monetary Rules in a non Ricardian Economy

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  • Jean-Pascal Benassy

    (CEPREMAP)

Abstract

We study in this article how the conduct of fiscal policy interacts with the choice of oprimal monetary rules by a central bank. We consider a non Ricardian model with nondistortionary fiscal policyt, and compare two policy packages, one where fiscal and monetary policy are simultaneously optimized, and one where the monetary policy is optimized under a given fiscal policy. We find a number of results that would not appear in the traditional Ricardian framework: (a) the optimal monetary rule may be activist when fiscal policy is kept constant, whereas it is not when combined with optimal fiscal policy; (b) combining optimally fiscal and monetary policies may lead to far superior outcomes, even when, following Sargent and Wallace (1975), government is allowed to react to much less information. (Copyright: Elsevier)

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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): 6 (2003)
Issue (Month): 3 (July)
Pages: 498-512

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Handle: RePEc:red:issued:v:6:y:2003:i:3:p:498-512

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Related research

Keywords: Monetary policy rules; fiscal policy; interest rate rules; optimal policy; nominal rigidities.;

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References

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  1. Bernardino Adão & Isabel Horta Correia & Pedro Teles, 2001. "Gaps and Triangles," Working Papers, Banco de Portugal, Economics and Research Department w200102, Banco de Portugal, Economics and Research Department.
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  13. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(2), pages 241-54, April.
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Cited by:
  1. Xavier Ragot, 2005. "A theory of low inflation in a non Ricardian economy with credit constraints," PSE Working Papers, HAL halshs-00590788, HAL.
  2. Marcela Meirelles-Aurelio, 2005. "The performance of monetary and fiscal rules in an open economy with imperfect capital mobility," Research Working Paper, Federal Reserve Bank of Kansas City RWP 05-01, Federal Reserve Bank of Kansas City.
  3. Javier Andres & Rafael Domenech & Campbell Leith, 2003. "Fiscal Policy, Macroeconomic Stability and Finite Horizons," Working Papers, Business School - Economics, University of Glasgow 2003_18, Business School - Economics, University of Glasgow, revised Oct 2003.

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