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Revisiting Public Debt and Inflation: Fiscal Implications of an Independent Central Banker

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  • Patrizio Tirelli

    (Department of Economics, University of Milan-Bicocca and University of Glasgow)

Abstract

The mainstream literature on monetary policy games under output persistence posits that: a) monetary regimes do not affect real variables in the steady state; b) optimal institutional design should entirely remove the inflation bias. We show that neither result necessarily holds if output persistence originates from debt dynamics and distortionary taxation. First, monetary delegation induces a strategic use of debt policy affecting steady-state distortions. Second, the reduction of such distortions may require monetary institutions that tolerate an inflation rate above the socially optimal level.

Suggested Citation

  • Patrizio Tirelli, 2000. "Revisiting Public Debt and Inflation: Fiscal Implications of an Independent Central Banker," Working Papers 31, University of Milano-Bicocca, Department of Economics, revised Nov 2000.
    • Handle: RePEc:mib:wpaper:31
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    References listed on IDEAS

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