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Nominal Targeting in an Economy with Government Debt

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  • Yuting Bai
  • Tatiana Kirsanova
  • Campbell Leith

Abstract

Most analyses of monetary policy delegation schemes typically ignore the behavior of the fiscal policy maker. The paper investigates how monetary price level targeting or monetary nominal income targeting may yield social gain in an economy with government debt and where the fiscal policymaker, acting strategically, may take counter actions. We argue that the choice of fiscal policy instrument plays an important role for the performance of monetary policy. The optimal choice of monetary policy delegation scheme depends crucially on the level of government debt and its maturity, with a switch from price level targeting being desirable to nominal income targets being strongly preferred as debt levels rise and maturity shortens.

Suggested Citation

  • Yuting Bai & Tatiana Kirsanova & Campbell Leith, 2015. "Nominal Targeting in an Economy with Government Debt," Working Papers 2015_16, Business School - Economics, University of Glasgow.
  • Handle: RePEc:gla:glaewp:2015_16
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    More about this item

    Keywords

    Monetary and Fiscal Policy Interactions; Price Level Targeing; Nominal Income Targeting; Discretionary Policy;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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