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Fiscal Requirements for Price Stability

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  • Michael Woodford

Abstract

This paper argues that maintaining price stability requires not only commitment to an appropriate monetary policy rule, but an appropriate fiscal policy rule as well. 'Ricardian equivalence' does not imply that fiscal policy is irrelevant, except in the case of a certain class of policies (called 'Ricardian' policies). The role of fiscal developments in inflation determination under a non-Ricardian regime is illustrated through an analysis of the U.S. bond-price support regime of the 1940s. Several recent theoretical challenges to the logical possibility of a non-Ricardian regime are addressed, and a number of consequences are then drawn for the choice of policies to ensure price stability. An example of a monetary-fiscal regime with attractive properties would combine a 'Taylor rule' for monetary policy with nominal-deficit targeting as a fiscal policy commitment.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8072.

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Date of creation: Jan 2001
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Handle: RePEc:nbr:nberwo:8072

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