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Gradualism in monetary policy and fiscal equilibrium

  • Helder Ferreira de Mendonça
  • Manoel Carlos de Castro Pires

Purpose – This paper aims to study a monetary policy problem, where concerns with price stability and with the impact of interest rates on public debt are simultaneously addressed. Design/methodology/approach – The problem is analytically approached under a new Keynesian monetary policy framework to which a budget constraint is added and, subsequently, the model's implications are empirically illustrated by characterizing Brazilian policies. Findings – The findings denote the existence of a trade-off between inflation target and public debt stability. Therefore the determination of an inflation target cannot neglect this trade-off. Furthermore, the empirical analysis from the Brazilian case shows that the Central Bank of Brazil takes into consideration public debt when determining the interest rate. Practical implications – The determination of the interest rate in an inflation targeting regime must consider the public debt stability. Originality/value – This paper makes a contribution on the theme of consistency between monetary policy and fiscal equilibrium.

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Article provided by Emerald Group Publishing in its journal Journal of Economic Studies.

Volume (Year): 37 (2010)
Issue (Month): 3 (September)
Pages: 327-342

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Handle: RePEc:eme:jespps:v:37:y:2010:i:3:p:327-342
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