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Optimal fiscal feedback on debt in an economy with nominal rigidities Author info | Abstract | Publisher info | Download info | Related research | Statistics Tatiana Kirsanova
Simon Wren-Lewis
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We examine the impact of different degrees of fiscal feedback on debt in an economy with nominal rigidities where monetary policy is optimal. We look at the extent to which different degrees of fiscal feedback enhance or detract from the ability of the monetary authorities to stabilize output and inflation. Using an objective function derived from utility, we find the optimal level of fiscal feedback to be small. A clear discontinuity exists in the behavior of monetary policy and welfare on either side of this optimal level. As the extent of fiscal feedback increases, optimal monetary policy becomes less active because fiscal feedback tends to deflate inflationary shocks. However, this fiscal stabilization is less efficient than monetary policy, so welfare declines. In contrast, if fiscal feedback falls below some critical value, optimal monetary policy becomes strongly passive, and this passive monetary policy leads to a sharp deterioration in welfare.
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Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number
2007-26.
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Date of creation: 2007Date of revision:
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references Cited by : (explanations , Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile , click on "citations" and make appropriate adjustments.)
Bill Martin, 2007.
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Tatiana Kirsanova & Simon Wren-Lewis, 2007.
"Optimal fiscal feedback on debt in an economy with nominal rigidities ,"
Working Paper
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