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The Advantage of Flexible Targeting Rules

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  • ANDREA FERRERO

Abstract

This paper investigates the consequences of debt stabilization for inflation targeting. If the monetary authority perfectly stabilizes inflation while the fiscal authority holds constant the real value of debt at maturity, the equilibrium dynamics might be indeterminate. However, determinacy can be restored by committing to targeting rules for either monetary or fiscal policy that include a concern for stabilization of the output gap. In solving the indeterminacy problem, flexible inflation targeting appears to be more robust than flexible debt targeting to alternative parameter configurations and steady-state fiscal stances. Conversely, flexible fiscal targeting rules lead to more desirable welfare outcomes. The paper further shows that if considerations beyond stabilization call for a combination of strict inflation and debt targeting rules, the indeterminacy result can be overturned if the fiscal authority commits to holding constant debt net of interest rate spending.

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File URL: http://hdl.handle.net/10.1111/j.1538-4616.2012.00513.x
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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 44 (2012)
Issue (Month): 5 (08)
Pages: 863-881

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Handle: RePEc:mcb:jmoncb:v:44:y:2012:i:5:p:863-881
DOI: j.1538-4616.2012.00513.x
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. George W. Evans & Seppo Honkapohja, 2006. "Monetary Policy, Expectations and Commitment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(1), pages 15-38, 03.
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Cited by:

  1. Smales, Lee A. & Apergis, Nick, 2016. "The influence of FOMC member characteristics on the monetary policy decision-making process," Journal of Banking & Finance, Elsevier, vol. 64(C), pages 216-231.

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