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The Choice of Monetary Regime

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  • Østrup, Finn

    (Department of Finance, Copenhagen Business School)

Abstract

The article examines how government spending is determined in a closed economy where the nominal wage is pre-set through contracts and the wage setters have perfect foresight regarding subsequent policy decisions. The monetary regime affects government spending because: (i) with a pre-set nominal wage, a given change in government spending has different effects on employment and inflation under different monetary regimes, and (ii) the authorities’ inclination to expand government spending is affected by the inflation rate which depends on the monetary regime. If the costs related to inflation are high, a comparison between monetary regimes suggests that welfare is highest under nominal income targeting where the nominal income target is determined to bring about price stability.

Suggested Citation

  • Østrup, Finn, 2006. "The Choice of Monetary Regime," Working Papers 2005-2, Copenhagen Business School, Department of Finance.
  • Handle: RePEc:hhs:cbsfin:2005_002
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    File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7174
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Monetary regimes; fiscal policy; monetary non-neutrality;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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