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Optimal Simple Rules for the Conduct of Monetary and Fiscal Policy

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Author Info
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 0406.

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

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

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Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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

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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. Campell Leith & Leopold von Thadden, 2006. "Monetary and fiscal policy interactions in a New Keynesian model with capital accumulation and non-Ricardian consumers," Working Paper Series 649, European Central Bank. [Downloadable!]
    Other versions:
  2. 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:
  3. Pelin Ilbas, 2007. "Optimal Monetary Policy Rules for the Euro Area in a DSGE Framework," Money Macro and Finance (MMF) Research Group Conference 2006 59, Money Macro and Finance Research Group. [Downloadable!]
  4. Michal Horvath, 2007. " Optimal Monetary and Fiscal Policy in an Economy with Non-Ricardian Agents," CDMA Working Paper Series 0703, Centre for Dynamic Macroeconomic Analysis, revised May 2007. [Downloadable!]
  5. Matthew Canzoneri, 2007. "Coordination of Monetary and Fiscal Policy in a Monetary Union: Policy Issues & Analytical Models," Money Macro and Finance (MMF) Research Group Conference 2006 165, Money Macro and Finance Research Group. [Downloadable!]
  6. Michal Horvath, 2006. " Monetary-Fiscal Interactions when Public Debt is Stationary," CDMA Working Paper Series 0607, Centre for Dynamic Macroeconomic Analysis, revised Mar 2007. [Downloadable!]
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