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Optimal Simple Rules for the Conduct of Monetary and Fiscal Policy

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  • Jagjit S. Chadha
  • Charles Nolan

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Abstract

Stabilization policy involves joint monetary and fiscal rules. We develop a model enabling us to characterize systematic simple monetary and fiscal policy over the business cycle. We principally focus on the following question: what are the key properties of the joint simple rule governing the conduct of systematic stabilization policy? We find that conducting stabilization policy incorporates not only a set of monetary policy choices governed by the so-called ‘Taylor principle’ but also fiscal policy that gives considerable force to automatic stabilizers. Recent US and UK monetary and fiscal choices seem broadly consistent with this model. This result is found to be robust to a number of alternate modeling strategies.

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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 200406.

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Date of creation: 15 Nov 2004
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Handle: RePEc:san:cdmawp:0406

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Keywords: Optimal simple rules; monetary and fiscal policy; finite lives.;

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