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Debt and Monetary Policy: The Policy Issues

In: The Debt Burden and its Consequences for Monetary Policy

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  • Rudi Dornbusch

    (Massachusetts Institute Of Technology)

Abstract

This paper explores issues in the relation of debt and monetary policy. Deficits are large, debts are rising absolutely and relative to GDP, unfunded liabilities greatly add to the explicit stock of debt. Debt (and deficits) play a special role at present, in the run up to Maastricht: the membership hurdle in terms of debts and deficits is hardly met by anyone. Debt is important in this context because large debts are seen as a threat to the integrity of the new European money or, at least, a serious complication and potential political pressure point in the exercise of sound monetary policy. But debt is also of interest in a less dramatic context from the simple question of what role it plays in the transmission mechanism of monetary policy.

Suggested Citation

  • Rudi Dornbusch, 1998. "Debt and Monetary Policy: The Policy Issues," International Economic Association Series, in: Guillermo Calvo & Mervyn King (ed.), The Debt Burden and its Consequences for Monetary Policy, chapter 1, pages 3-27, Palgrave Macmillan.
    • Handle: RePEc:pal:intecp:978-1-349-26077-5_1
    DOI: 10.1007/978-1-349-26077-5_1
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    References listed on IDEAS

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    1. John B. Taylor, 1995. "Monetary policy implications of greater fiscal discipline," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 151-170.
    2. Marta Campillo & Jeffrey A. Miron, 1997. "Why Does Inflation Differ across Countries?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 335-362, National Bureau of Economic Research, Inc.
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    4. Bohn, Henning, 1990. "A positive theory of foreign currency debt," Journal of International Economics, Elsevier, vol. 29(3-4), pages 273-292, November.
    5. Haliassos, Michael & Tobin, James, 1990. "The macroeconomics of government finance," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 17, pages 889-959, Elsevier.
    6. Alan S. Blinder, 1982. "On the Monetization of Deficits," NBER Working Papers 1052, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Jackson, Laura E. & Owyang, Michael T. & Zubairy, Sarah, 2018. "Debt and stabilization policy: Evidence from a Euro Area FAVAR," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 67-91.
    2. Sergey Pekarski, 2017. "Tight Money and the Sustainability of Public Debt," International Journal of Central Banking, International Journal of Central Banking, vol. 13(1), pages 191-223, February.
    3. repec:zbw:bofrdp:2002_014 is not listed on IDEAS
    4. Paolo Pasimeni, 2014. "An Optimum Currency Crisis," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 11(2), pages 173-204, December.
    5. Uhlig, H.F.H.V.S. & Beetsma, R.M.W.J., 1997. "An Analysis of the Stability Pact," Other publications TiSEM 030c82d8-1088-4f22-a337-c, Tilburg University, School of Economics and Management.
    6. Stefan Gerlach, 2013. "Monetary Policy after the Crisis," Manchester School, University of Manchester, vol. 81, pages 16-34, September.
    7. Abdul‐Aziz Iddrisu & Imhotep Paul Alagidede, 2020. "Is the interest rate setting behaviour of the Bank of Ghana constrained by high debt levels?," African Development Review, African Development Bank, vol. 32(3), pages 459-471, September.
    8. Pohjola, Tapio, 2002. "Effects of fiscal policy on the durability of low inflation regimes," Research Discussion Papers 14/2002, Bank of Finland.
    9. Seghezza, Elena & Morelli, Pierluigi, 2014. "Conflict inflation and delayed stabilization," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 171-184.
    10. Togo, Eriko, 2007. "Coordinating public debt management with fiscal and monetary policies : an analytical framework," Policy Research Working Paper Series 4369, The World Bank.
    11. Francesco Pasimeni & Paolo Pasimeni, 2016. "An Institutional Analysis of the Europe 2020 Strategy," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 127(3), pages 1021-1038, July.
    12. Patricia Correa, 2000. "Public Debt , Publit Debt Markets And Monetary Policy In Colombia," Borradores de Economia 3406, Banco de la Republica.
    13. Pohjola, Tapio, 2002. "Effects of fiscal policy on the durability of low inflation regimes," Bank of Finland Research Discussion Papers 14/2002, Bank of Finland.
    14. Patricia Correa, 2000. "Public Debt, Public Debt Markets and Monetary Policy in Colombia," Borradores de Economia 147, Banco de la Republica de Colombia.
    15. László Andor, 2016. "Towards shared unemployment insurance in the euro area," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 5(1), pages 1-15, December.
    16. Ms. Srobona Mitra, 2007. "Is the Quantity of Government Debt a Constraint for Monetary Policy?," IMF Working Papers 2007/062, International Monetary Fund.

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    More about this item

    Keywords

    Interest Rate; Monetary Policy; Central Bank; Fiscal Policy; Real Interest Rate;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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