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Simple Monetary-Fiscal Targeting Rules

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Author Info
Michal Horvath ()

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Abstract

We analyze the characteristics of optimal dynamics in an economy in which neither prices nor wages adjust instantaneously and lump-sum taxes are unavailable as a source of government finance. We then propose that monetar and fiscal policy should be coordinated to satisfy a pair of simple specific targeting rules, a rule for (wage) inflation and a relationship that links the growth of real wages to past price and wage developments, and output gap dynamics. We show that such simple rule-based conduct of policy can do remarkably well in replicating the dynamics of the economy under optimal policy following a given shock.

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File URL: http://www.st-andrews.ac.uk/economics/CDMA/papers/wp0801.pdf
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Publisher Info
Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 0801.

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Date of creation: Jan 2008
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Handle: RePEc:san:cdmawp:0801

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Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL
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Related research
Keywords: Optimal Monetary and Fiscal Policy; Timeless Perspective; Nominal Rigidity; Simple Targeting Rules.;

Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
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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This page was last updated on 2009-11-25.

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