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Interest rate bounds and fiscal policy

  • Chadha, Jagjit S.
  • Nolan, Charles

When the monetary authority controls the short-term interest rate we find that under a regime of permanent (and even persistent but temporary) deficits that a strict upper bound on the feasible interest rate sequence is present. More generally, the satisfaction of the fiscal authority’s present value budget constraint in the presence of a deficit sequence, means that monetary and fiscal decisions cannot be independent. This is an important caveat to the results in McCallum (1984).

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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 84 (2004)
Issue (Month): 1 (July)
Pages: 9-15

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Handle: RePEc:eee:ecolet:v:84:y:2004:i:1:p:9-15
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  1. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, December.
  2. McCallum, Bennett T, 1984. "Are Bond-Financed Deficits Inflationary? A Ricardian Analysis," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 123-35, February.
  3. O'Connell, Stephen A & Zeldes, Stephen P, 1988. "Rational Ponzi Games," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 431-50, August.
  4. Canzoneri, Matthew B & Cumby, Robert & Diba, Behzad, 1998. "Is the Price Level Determined by the Needs of Fiscal Solvency?," CEPR Discussion Papers 1772, C.E.P.R. Discussion Papers.
  5. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc.
  6. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
  7. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
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