IDEAS home Printed from https://ideas.repec.org/a/pal/imfecr/v72y2024i1d10.1057_s41308-023-00214-x.html
   My bibliography  Save this article

Gambling to Preserve Price (and Fiscal) Stability

Author

Listed:
  • Giancarlo Corsetti

    (European University Institute and CEPR)

  • Bartosz Maćkowiak

    (European Central Bank and CEPR)

Abstract

We study a model in which policy aims at aggregate price stability. A fiscal imbalance materializes that, if uncorrected, must cause inflation, but the imbalance may get corrected in the future with some probability. By maintaining price stability in the near term, monetary policy can buy time for a correction to take place. The policy gamble may succeed, preserving price and fiscal stability, or fail, leading to a delayed, possibly large jump in the price level. The resulting dynamics resemble the models of a currency crisis following Krugman (J Money Credit Bank 11:311–325, 1979) and Obstfeld (Am Econ Rev 76: 72–81, 1986). Like in Obstfeld’s work, multiple equilibria arise naturally: whether or not price stability is preserved may depend on private agents’ expectations. The model can be reinterpreted as a model of partial default on public debt, in which case it is reminiscent of Calvo (Am Econ Rev 78:647–661, 1988).

Suggested Citation

  • Giancarlo Corsetti & Bartosz Maćkowiak, 2024. "Gambling to Preserve Price (and Fiscal) Stability," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(1), pages 32-57, March.
    • Handle: RePEc:pal:imfecr:v:72:y:2024:i:1:d:10.1057_s41308-023-00214-x
    DOI: 10.1057/s41308-023-00214-x
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/s41308-023-00214-x
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1057/s41308-023-00214-x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:imfecr:v:72:y:2024:i:1:d:10.1057_s41308-023-00214-x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave-journals.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.