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Fiscal Requirements for Price Stability

  • Woodford, Michael

Maintaining price stability requires not only commitment to an appropriate monetary policy rule, but an appropriate fiscal policy rule as well. Ricardian equivalence does not imply that fiscal policy is irrelevant, except in the case of a certain class of policies ("Ricardian" policies). The role of fiscal developments in inflation determination under a non-Ricardian regime is illustrated through an analysis of the bond-price support regime of the 1940s. A monetary-fiscal regime with attractive properties would combine a "Taylor rule" for monetary policy with nominal-deficit targeting as a fiscal policy commitment.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 33 (2001)
Issue (Month): 3 (August)
Pages: 669-728

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Handle: RePEc:mcb:jmoncb:v:33:y:2001:i:3:p:669-728
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