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Optimal Simple Rules for the Conduct of Monetary and Fiscal Policy

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  • Chadha, J.S.
  • Charles Nolan

Abstract

We develop a simple model for studying the impact of monetary and fiscal policies on aggregate demand, at the business cycle frequencies. We focus on two questions principally. First, what are the key properties of the joint optimal simple rules governing the conduct of the systematic components of monetary and fiscal policy? Second, following Blanchard (1985) we construct an index of fiscal stance to disentangle the ‘expenditure’ and wealth effects of fiscal policy. We find that underpinning the so-called ‘Taylor principle’ is a fiscal policy maker giving full force to automatic stabilizers. We also find that the Mundellian assignment of policy instruments may have attractive properties.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0224.

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Length: 35
Date of creation: Oct 2002
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Handle: RePEc:cam:camdae:0224

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Keywords: optimal simple rules; monetary and fiscal policy; finite lives;

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