Learning the Fiscal Monetary Interaction under Trend Infl?ation
What are the effects of a higher inflation target on the determinacy properties under alternative monetary/fiscal policy mixes in New Keynesian models? Would it be more difficult for the central bank to stabilize inflation expectations if the inflation target is raised? What role for central bank transparency? We find that trend inflation does not affect determinacy as long as monetary policy is passive. Conversely, an active central bank should fight inflation more strongly with higher trend inflation, in order to guarantee the determinacy of the AM/PF equilibrium. Furthermore, this equilibrium, if determinate, is always E-stable under transparency. In the AF/PM case the equilibrium is always determinate and E-stable under both transparency and opacity. We find the degree of price stickiness to be a crucial structural parameter. In particular, in a low price rigidity country, say the United States, adhering to the Taylor principle is a sufficient condition for equilibrium determinacy under the AM/PF regime, irrespective of the level of trend inflation. Still, the central bank must be transparent to stabilize expectations. On the contrary, in a high price rigidity economy, say Europe, to have determinacy under AM/PF mix, the inflation target cannot be larger than 2% but the central bank needs not to be transparent to stabilize expectations. Furthermore, high rigidity makes non-Ricardian policies less E-stable.
|Date of creation:||Feb 2014|
|Date of revision:|
|Contact details of provider:|| Postal: Via S. Felice, 5 - 27100 Pavia|
Web page: http://epmq.unipv.eu/site/home.html
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kaushik Mitra & James Bullard, .
"Learning About Monetary Policy Rules,"
00/41, Department of Economics, University of York.
- Bruce Preston, 2003.
"Learning about monetary policy rules when long-horizon expectations matter,"
FRB Atlanta Working Paper
2003-18, Federal Reserve Bank of Atlanta.
- Bruce Preston, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
- Preston, Bruce, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," MPRA Paper 830, University Library of Munich, Germany.
- Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001.
"Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy,"
NBER Working Papers
8403, National Bureau of Economic Research, Inc.
- Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
- Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
- Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
- Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
- Olivier J. Blanchard & Giovanni Dell'Ariccia & Paolo Mauro, 2010.
"Rethinking Macroeconomic Policy,"
IMF Staff Position Notes
2010/03, International Monetary Fund.
- Frank Smets & Raf Wouters, 2003.
"An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area,"
Journal of the European Economic Association,
MIT Press, vol. 1(5), pages 1123-1175, 09.
- Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
- Francesco Bianchi, 2012. "Evolving Monetary/Fiscal Policy Mix in the United States," American Economic Review, American Economic Association, vol. 102(3), pages 167-72, May.
- Davig, Troy & Leeper, Eric M., 2009.
"Monetary-Fiscal Policy Interactions and Fiscal Stimulus,"
CEPR Discussion Papers
7509, C.E.P.R. Discussion Papers.
- Davig, Troy & Leeper, Eric M., 2011. "Monetary-fiscal policy interactions and fiscal stimulus," European Economic Review, Elsevier, vol. 55(2), pages 211-227, February.
- Troy Davig & Eric M. Leeper, 2009. "Monetary-Fiscal Policy Interactions and Fiscal Stimulus," NBER Working Papers 15133, National Bureau of Economic Research, Inc.
- Troy Davig & Eric Leeper, 2009. "Monetary-Fiscal Policy Interactions And Fiscal Stimulus," Caepr Working Papers 2009-010, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
- Troy A. Davig & Eric M. Leeper, 2009. "Monetary-fiscal policy interactions and fiscal stimulus," Research Working Paper RWP 09-12, Federal Reserve Bank of Kansas City.
- WILLIAM A. BRANCH & TROY DAVIG & BRUCE McGOUGH, 2008. "Monetary-Fiscal Policy Interactions under Implementable Monetary Policy Rules," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(5), pages 1095-1102, 08.
- Guido Ascari & Tiziano Ropele, 2007.
"Optimal monetary policy under low trend inflation,"
Temi di discussione (Economic working papers)
647, Bank of Italy, Economic Research and International Relations Area.
- Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
When requesting a correction, please mention this item's handle: RePEc:pav:demwpp:068. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Alice Albonico)
If references are entirely missing, you can add them using this form.