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On (Sub)Optimal Monetary Policy Rules under Untied Fiscal Hands

  • Paolo ZAGAGLIA

    ([n.a.])

We examine the interplay between monetary and fiscal policies in a context where disturbances to the public deficit process are a primary source of macroeconomic instability. We perform simulations of optimal targeting rules on a sticky-price model a la Woodford (1996). Our investigation compares the dynamic adjustment path under inflation targeting with that arising from nominal income growth targeting. When fiscal shocks enter the picture, inflation targeting is a superior strategy. In opposition to Jensen (1999)'s results, we show that an inflation targeter is capable of bringing about the required degree of interest rate inertia. This does not occur at the cost of additional nominal instability.

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File URL: http://docs.dises.univpm.it/web/quaderni/pdf/162.pdf
File Function: First version, 2002
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Paper provided by Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali in its series Working Papers with number 162.

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Length: 36
Date of creation: Mar 2002
Date of revision:
Handle: RePEc:anc:wpaper:162
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