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The Choice of Monetary Regime

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Author Info
Østrup, Finn (Department of Finance, Copenhagen Business School)
Abstract

The article examines how government spending is determined in a closed economy where the nominal wage is pre-set through contracts and the wage setters have perfect foresight regarding subsequent policy decisions. The monetary regime affects government spending because: (i) with a pre-set nominal wage, a given change in government spending has different effects on employment and inflation under different monetary regimes, and (ii) the authorities’ inclination to expand government spending is affected by the inflation rate which depends on the monetary regime. If the costs related to inflation are high, a comparison between monetary regimes suggests that welfare is highest under nominal income targeting where the nominal income target is determined to bring about price stability.

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File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7174
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Publisher Info
Paper provided by Copenhagen Business School, Department of Finance in its series Working Papers with number 2005-2.

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Length: 23 pages
Date of creation: 27 Jun 2006
Date of revision:
Handle: RePEc:hhs:cbsfin:2005_002

Contact details of provider:
Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark
Phone: +45 3815 3815
Email:
Web page: http://www.cbs.dk/departments/finance/
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Related research
Keywords: Monetary regimes; fiscal policy; monetary non-neutrality;

Find related papers by JEL classification:
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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References listed on IDEAS
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    Other versions:
  4. Woodford, Michael, 2001. "Fiscal Requirements for Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 669-728, August.
    Other versions:
  5. Henrik Jensen, 2002. "Targeting Nominal Income Growth or Inflation?," American Economic Review, American Economic Association, vol. 92(4), pages 928-956, September. [Downloadable!]
    Other versions:
  6. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August. [Downloadable!] (restricted)
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  7. Svensson, Lars E O, 1995. "Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts," CEPR Discussion Papers 1249, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  8. Agell, Jonas & Calmfors, Lars & Jonsson, Gunnar, 1996. "Fiscal policy when monetary policy is tied to the mast," European Economic Review, Elsevier, vol. 40(7), pages 1413-1440, August. [Downloadable!] (restricted)
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  12. Robert E. Hall & N. Gregory Mankiw, 1994. "Nominal Income Targeting," NBER Chapters, in: Monetary Policy, pages 71-94 National Bureau of Economic Research, Inc. [Downloadable!]
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  13. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October. [Downloadable!] (restricted)
    Other versions:
  14. Jensen, Henrik, 1994. "Loss of monetary discretion in a simple dynamic policy game," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 763-779. [Downloadable!] (restricted)
    Other versions:
  15. Beetsma, R.M.W.J. & Bovenberg, A.L., 1995. "Monetary Union without Fiscal Coordination May Discipline Policymakers," DELTA Working Papers 95-22, DELTA (Ecole normale supérieure).
    Other versions:
  16. Roel M. W. J. Beetsma & Henrik Jensen, 1999. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts: Comment," American Economic Review, American Economic Association, vol. 89(1), pages 342-347, March. [Downloadable!] (restricted)
    Other versions:
  17. Galí, Jordi, 2002. "New Perspectives on Monetary Policy, Inflation and the Business Cycle," CEPR Discussion Papers 3210, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  18. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 195-225. [Downloadable!]
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  19. Wong, Ka-fu, 2000. "Variability in the Effects of Monetary Policy on Economic Activity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(2), pages 179-98, May.
  20. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 553-578, June. [Downloadable!] (restricted)
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  21. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond. [Downloadable!]
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  22. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December. [Downloadable!] (restricted)
  23. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June. [Downloadable!] (restricted)
  24. Levine, Paul & Brociner, Andrew, 1994. "Fiscal policy coordination and EMU : A dynamic game approach," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 699-729. [Downloadable!] (restricted)
    Other versions:
  25. Dixit, Avinash, 2001. "Games of monetary and fiscal interactions in the EMU," European Economic Review, Elsevier, vol. 45(4-6), pages 589-613, May. [Downloadable!] (restricted)
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