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.
Length: Date of creation: Jan 2001 Date of revision: Publication status: published as Woodford, Michael. "Fiscal Requirements For Price Stability," Journal of Money, Credit and Banking, 2001, v33(3,Aug), 669-728. Handle: RePEc:nbr:nberwo:8072
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Find related papers by JEL classification: E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
References listed on IDEAS 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.:
Daniel, Betty C, 2001.
"A Fiscal Theory of Currency Crises,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 969-88, November.
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