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Simple Monetary-Fiscal Targeting Rules

Author

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  • Michal Horvath

Abstract

We analyze the characteristics of optimal dynamics in an economy in which neither prices nor wages adjust instantaneously and lump-sum taxes are unavailable as a source of government finance. We then propose that monetar and fiscal policy should be coordinated to satisfy a pair of simple specific targeting rules, a rule for (wage) inflation and a relationship that links the growth of real wages to past price and wage developments, and output gap dynamics. We show that such simple rule-based conduct of policy can do remarkably well in replicating the dynamics of the economy under optimal policy following a given shock.

Suggested Citation

  • Michal Horvath, 2008. "Simple Monetary-Fiscal Targeting Rules," CDMA Working Paper Series 200801, Centre for Dynamic Macroeconomic Analysis.
    • Handle: RePEc:san:cdmawp:0801
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    File URL: http://www.st-andrews.ac.uk/~wwwecon/CDMA/papers/wp0801.pdf
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    Cited by:

    1. Benigno, Pierpaolo & Woodford, Michael, 2012. "Linear-quadratic approximation of optimal policy problems," Journal of Economic Theory, Elsevier, vol. 147(1), pages 1-42.

    More about this item

    Keywords

    Optimal Monetary and Fiscal Policy; Timeless Perspective; Nominal Rigidity; Simple Targeting Rules.;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • 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

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