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Interest Rate Bounds and Fiscal Policy

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Author Info
Jagjit S. Chadha ()
Charles Nolan ()

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Abstract

When the monetary authority controls the short-term interest rate we find that under a regime of permanent (and even persistent but temporary) deficits that a strict upper bound on the feasible interest rate sequence is present. More generally, the satisfaction of the fiscal authority’s present value budget constraint in the presence of a deficit sequence, means that monetary and fiscal decisions cannot be independent. This is an important caveat to the results in McCallum (1984).

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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 0401.

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Date of creation: Oct 2004
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Publication status: Forthcoming in Economics Letters
Handle: RePEc:san:cdmawp:0401

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Related research
Keywords: Intertemporal macro; monetary policy and fiscal policy interactions.;

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Find related papers by JEL classification:
E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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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.:
  1. O'Connell, Stephen A & Zeldes, Stephen P, 1988. "Rational Ponzi Games," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 431-50, August. [Downloadable!] (restricted)
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  2. Bennett T. McCallum, 1984. "Are Bond-Financed Deficits Inflationary? A Ricardian Analysis," NBER Working Papers 0905, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2001. "Is the Price Level Determined by the Needs of Fiscal Solvency?," American Economic Review, American Economic Association, vol. 91(5), pages 1221-1238, December. [Downloadable!] (restricted)
    Other versions:
  4. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall. [Downloadable!]
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Cited by:
(explanations, 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.)

  1. Tatiana Damjanovic & Charles Nolan, 2005. " Some Welfare Implications of Optimal Stabilization Policy in an Economy with Capital and Sticky Prices," CDMA Working Paper Series 0509, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
    Other versions:
  2. Jagjit S. Chadha & Charles Nolan, 2004. " Optimal Simple Rules for the Conduct of Monetary and Fiscal Policy," CDMA Working Paper Series 0406, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
    Other versions:
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