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Central bank Instruments, Fiscal Policy Regimes, and the Requirements for Equilibrium Determinacy

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  • Andreas Schabert

Abstract

In this paper we examine the local determinacy conditions for three monetary policy regimes in a business cycle model with staggered price setting. The central bank either controls the nominal interest rate, the money growth rate, or it conducts open market operations and controls the bond-to-money ratio herein. All instruments are set contingent on changes in current inflation. For the first two cases, equilibrium determinacy imposes strong restrictions on the endogenous response to changes in inflation, which depend on whether fiscal policy is Ricardian or non-Ricardian. In the case of open market policy, Ricardian equivalence does not hold and government solvency is guaranteed for finite bond-to- money ratios. The central bank can ensure determinacy by setting the latter not in an extremely reactive way. The equilibrium sequence of real financial wealth then exerts a stabilizing impact on prices and real activity such that equilibrium multiplicity as well as explosiveness is ruled out.

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  • Andreas Schabert, "undated". "Central bank Instruments, Fiscal Policy Regimes, and the Requirements for Equilibrium Determinacy," Working Papers 2003_5, Business School - Economics, University of Glasgow, revised Jan 2003.
  • Handle: RePEc:gla:glaewp:2003_5
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    2. Chowdhury, Ibrahim & Schabert, Andreas, 2008. "Federal reserve policy viewed through a money supply lens," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 825-834, May.
    3. Stefan Niemann & Paul Pichler & Gerhard Sorger, 2013. "Central Bank Independence And The Monetary Instrument Problem," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(3), pages 1031-1055, August.
    4. Schabert, Andreas, 2009. "Money supply, macroeconomic stability, and the implementation of interest rate targets," Journal of Macroeconomics, Elsevier, vol. 31(2), pages 333-344, June.
    5. Dennis Bonam & Jasper Lukkezen, 2014. "Fiscal and Monetary Policy Coordination, Macroeconomic Stability, and Sovereign Risk," Tinbergen Institute Discussion Papers 14-006/VI, Tinbergen Institute.
    6. Auray, Stéphane & Fève, Patrick, 2008. "On the observational (non)equivalence of money growth and interest rate rules," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 801-816, September.
    7. Muhammad Ali Nasir & Alaa M. Soliman, 2014. "Aspects of Macroeconomic Policy Combinations and Their Effects on Financial Markets," Economic Issues Journal Articles, Economic Issues, vol. 19(1), pages 95-118, March.

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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