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High trend inflation and passive monetary detours

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  • Ascari, Guido
  • Florio, Anna
  • Gobbi, Alessandro

Abstract

Does the long-run Taylor principle (Davig and Leeper, 2007) hold when both monetary and fiscal policies can switch and there is positive trend inflation? We find that with high trend inflation passive monetary detours are no longer possible, whatever fiscal policy is in place. This has important policy implications in terms of flexibility and monetary–fiscal authorities coordination.

Suggested Citation

  • Ascari, Guido & Florio, Anna & Gobbi, Alessandro, 2018. "High trend inflation and passive monetary detours," Economics Letters, Elsevier, vol. 172(C), pages 138-142.
  • Handle: RePEc:eee:ecolet:v:172:y:2018:i:c:p:138-142
    DOI: 10.1016/j.econlet.2018.08.030
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    More about this item

    Keywords

    Trend inflation; Monetary–fiscal policy interactions; Markov-switching; Determinacy;
    All these keywords.

    JEL classification:

    • 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; Treasury Policy

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