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

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Andreas Schabert () (Universiteit van Amsterdam)

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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.

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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 06-025/2.

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Date of creation: 08 Mar 2006
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Handle: RePEc:dgr:uvatin:20060025

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Related research
Keywords: Fiscal-Monetary Policy Interaction Money Growth Bond-to-Money Ratio Local Equilibrium Determinancy

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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