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Simple Monetary-Fiscal Targeting Rules

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  • Michal Horvath

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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Bibliographic Info

Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 200801.

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Date of creation: 15 Jan 2008
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Handle: RePEc:san:cdmawp:0801

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Keywords: Optimal Monetary and Fiscal Policy; Timeless Perspective; Nominal Rigidity; Simple Targeting Rules.;

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