Advanced Search
MyIDEAS: Login to save this paper or follow this series

Optimal Monetary and Fiscal Stabilisation Policies

Contents:

Author Info

  • Klaus Adam

Abstract

This paper studies optimal stabilisation policies under commitment when monetary policy sets nominal interest rates and fiscal policy decides on public expenditure, income tax rates, and issuance of nominal non-contingent debt. High levels of government debt adversely affect the steady state of the economy and increase aggregate volatility. The latter emerges because debt exposes the government budget to real interest rate risk and thereby induces stronger volatility of taxes and public spending. The optimal variability of fiscal deficits is found to increase with the level of government debt, while the optimal variability of nominal interest rates decreases. Overall, optimal stabilisation policy does not require annual fiscal deficits to deviate by more than 3 percentage points of GDP from their steady state value or nominal interest rates to fall all the way to zero. Only if the standard deviation of economic disturbances is two to three times larger than suggested by post-war evidence do such events occur with non-negligible probability. Politique optimale de stabilisation monétaire et budgétaire Cet article étudie la politique optimale de stabilisation dans des conditions telles que la politique monétaire fixe les taux d’intérêt nominaux et la politique budgétaire détermine les dépenses publiques, les taux de l’impôt sur les revenus et l’émission de la dette nominale non contingente. Un niveau élevé d’endettement public a des effets négatifs sur l’état stationnaire de l’économie et accroît la volatilité globale. Cette volatilité tient à ce que la dette expose le budget de l’État à un risque de taux d’intérêt réel et provoque donc une plus grande instabilité de l’impôt et des dépenses publiques. On constate que la variabilité optimale des déficits budgétaires s’accroît en fonction du niveau de la dette publique, contrairement à la variabilité des taux d’intérêt nominaux, qui diminue. Au total, une politique optimale de stabilisation n’exige pas que le déficit budgétaire annuel s’écarte de plus de 3 points de PIB de sa valeur à l’état stationnaire, ni que les taux d’intérêt nominaux tombent totalement à zéro. C’est seulement si l’écart type des perturbations économiques est deux à trois fois supérieur aux résultats observés depuis la fin de la guerre que de tels événements se produisent, avec une probabilité non négligeable.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://dx.doi.org/10.1787/5kmfwj7s5pjk-en
Download Restriction: no

Bibliographic Info

Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 765.

as in new window
Length:
Date of creation: 04 May 2010
Date of revision:
Handle: RePEc:oec:ecoaaa:765-en

Contact details of provider:
Postal: 2 rue Andre Pascal, 75775 Paris Cedex 16
Phone: 33-(0)-1-45 24 82 00
Fax: 33-(0)-1-45 24 85 00
Email:
Web page: http://www.oecd.org
More information through EDIRC

Related research

Keywords: distortionary taxes; interest rate policy; Ramsey optimal policy; non-contingent government debt; government spending; distorsions fiscales; politique de taux d’intérêt; dette publique non contingente; Politique optimale de Ramsey; dépenses publiques;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Klaus Adam & Roberto M. Billi, 2010. "Distortionary fiscal policy and monetary policy goals," Research Working Paper, Federal Reserve Bank of Kansas City RWP 10-10, Federal Reserve Bank of Kansas City.
  2. Adam, Klaus & Billi, Roberto M., 2006. "Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(7), pages 1877-1905, October.
  3. Luis J. Álvarez & Emmanuel Dhyne & Marco M. Hoeberichts & Claudia Kwapil & Hervé le Bihan & Patrick Lünnemann & Fernando Martins & Roberto Sabbatini & Harald Stahl & Philip Vermeulen & Jouko Vilmun, 2005. "Sticky prices in the euro area: a summary of new micro evidence," Banco de Espa�a Working Papers 0542, Banco de Espa�a.
  4. Ascari, Guido & Ropele, Tiziano, 2007. "Optimal monetary policy under low trend inflation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(8), pages 2568-2583, November.
  5. Díaz-Giménez, Javier & Giovannetti, Giorgia & Marimon, Ramon & Teles, Pedro, 2007. "Nominal Debt as a Burden on Monetary Policy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6595, C.E.P.R. Discussion Papers.
  6. Martin Uribe & Stephanie Schmitt-Grohe, 2001. "Optimal fiscal and monetary policy under sticky prices," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Jun.
  7. Michael Woodford, 1998. "Doing Without Money: Controlling Inflation in a Post-Monetary World," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 173-219, January.
  8. Adam, Klaus & Billi, Roberto M, 2006. "Monetary Conservatism and Fiscal Policy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5740, C.E.P.R. Discussion Papers.
  9. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 27(1), pages 129-147, February.
  10. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  11. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
  12. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 78(3), pages 402-17, June.
  13. Klaus Adam & Roberto M. Billi, 2005. "Discretionary monetary policy and the zero lower bound on nominal interest rates," Research Working Paper, Federal Reserve Bank of Kansas City RWP 05-08, Federal Reserve Bank of Kansas City.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:oec:ecoaaa:765-en. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.