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Interest rate bounds and fiscal policy

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  • Chadha, Jagjit S.
  • Nolan, Charles

Abstract

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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Suggested Citation

  • Chadha, Jagjit S. & Nolan, Charles, 2004. "Interest rate bounds and fiscal policy," Economics Letters, Elsevier, vol. 84(1), pages 9-15, July.
  • Handle: RePEc:eee:ecolet:v:84:y:2004:i:1:p:9-15
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    References listed on IDEAS

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    1. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2001. "Is the Price Level Determined by the Needs of Fiscal Solvency?," American Economic Review, American Economic Association, vol. 91(5), pages 1221-1238, December.
    2. 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 431-450, August.
    3. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters,in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
    4. McCallum, Bennett T, 1984. "Are Bond-Financed Deficits Inflationary? A Ricardian Analysis," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 123-135, February.
    5. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters,in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
    6. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    7. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
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    Cited by:

    1. Tatiana Damjanovic & Charles Nolan, 2006. "Some Welfare Implications Of Optimal Stabilisation Policy In An Economy With Capital And Sticky Prices," Scottish Journal of Political Economy, Scottish Economic Society, vol. 53(1), pages 47-71, February.
    2. Philip Turner, 2013. "Benign neglect of the long-term interest rate," BIS Working Papers 403, Bank for International Settlements.
    3. Chadha, Jagjit S. & Nolan, Charles, 2007. "Optimal simple rules for the conduct of monetary and fiscal policy," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 665-689, December.
    4. Sergey Pekarski, 2017. "Tight Money and the Sustainability of Public Debt," International Journal of Central Banking, International Journal of Central Banking, vol. 13(1), pages 191-223, February.

    More about this item

    JEL classification:

    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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