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Monetary Instrument Problem Revisited: The Role of Fiscal Policy

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  • Soyoung Kim

Abstract

The monetary instrument problem is examined in an endowment economy model with various stochastic disturbances, with minimizing the variance of inflation as the policy objective. Following current developments in the theory of fiscal determination of the price level, for different monetary policies, active or passive fiscal policy is specified to guarantee a unique equilibrium. The responses of inflation to various structural disturbances in the constant money growth rate-passive fiscal (the active monetary-passive fiscal regime, or the conventional regime where Ricardian equivalence and Quantity Theory of Money hold) and the constant interest rate-active fiscal regime (the passive monetary-active fiscal regime, or the regime where fiscal policy determines the price level) are explained based on monetary and fiscal policiesƒÿ role in financing government deficit changes and satisfying the government budget constraint in each regime, which is different from the explanations of past research following Poole. One of interesting findings is that an increase in the steady state real value of nominal government debts (bonds) reduces the variance of inflation in the passive monetary-active fiscal regime.

Suggested Citation

  • Soyoung Kim, 2001. "Monetary Instrument Problem Revisited: The Role of Fiscal Policy," Computing in Economics and Finance 2001 202, Society for Computational Economics.
  • Handle: RePEc:sce:scecf1:202
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    Citations

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    Cited by:

    1. Djelassi, Mouldi & Essid, Lobna, 2012. "Le niveau des prix en Tunisie est-il déterminé par la politique budgétaire?," L'Actualité Economique, Société Canadienne de Science Economique, vol. 88(2), pages 231-256, Juin.
    2. Kim, Soyoung, 2004. "Inflation volatility, government debts, and the fiscal theory of the price level," Economics Letters, Elsevier, vol. 85(1), pages 117-121, October.

    More about this item

    Keywords

    monetary instrument problem; variance of inflation; fiscal policy;

    JEL classification:

    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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