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Gradualism in monetary policy and fiscal equilibrium

Author

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  • Helder Ferreira de Mendonça
  • Manoel Carlos de Castro Pires

Abstract

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.

Suggested Citation

  • Helder Ferreira de Mendonça & Manoel Carlos de Castro Pires, 2010. "Gradualism in monetary policy and fiscal equilibrium," Journal of Economic Studies, Emerald Group Publishing, vol. 37(3), pages 327-342, August.
  • Handle: RePEc:eme:jespps:v:37:y:2010:i:3:p:327-342
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    Cited by:

    1. Helder de Mendonca, 2007. "Towards credibility from inflation targeting: the Brazilian experience," Applied Economics, Taylor & Francis Journals, vol. 39(20), pages 2599-2615.

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