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Optimal simple rules for the conduct of monetary and fiscal policy

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  • Chadha, Jagjit S.
  • Nolan, Charles

Abstract

We develop a simple model for studying the impact of monetary and fiscal policies on aggregate demand, at the business cycle frequencies. We focus on two questions principally. First, what are the key properties of the joint optimal simple rules governing the conduct of the systematic components of monetary and fiscal policy? Second, following Blanchard (1985) we construct an index of fiscal stance to disentangle the ‘expenditure’ and wealth effects of fiscal policy. We find that underpinning the so-called ‘Taylor principle’ is a fiscal policy maker giving full force to automatic stabilizers. We also find that the Mundellian assignment of policy instruments may have attractive properties.
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  • 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.
  • Handle: RePEc:eee:jmacro:v:29:y:2007:i:4:p:665-689
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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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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