Rights statement: This is the author’s version of a work that was accepted for publication in European Economic Review. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in European Economic Review, 94, 2017 DOI: 10.1016/j.euroecorev.2017.02.011
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Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
}
TY - JOUR
T1 - Nominal targeting in an economy with government debt
AU - Bai, Yuting
AU - Kirsanova, Tatiana
AU - Leith, Campbell
N1 - This is the author’s version of a work that was accepted for publication in European Economic Review. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in European Economic Review, 94, 2017 DOI: 10.1016/j.euroecorev.2017.02.011
PY - 2017/5
Y1 - 2017/5
N2 - The fiscal policy environment central banks operate in can be radically different withrespect to debt levels, maturity structures and whether or not fiscal adjustments are spendingortax-based. Despite this, most analyses of monetary policy delegation schemes typicallyignore the behavior of the fiscal policy maker. This paper investigates whether delegatingeither nominal income or price level targets to a monetary authority yields social gains inan economy with government debt, where the fiscal policymaker, acting strategically, maysupport or undermine the policies of the central bank. We argue that the fiscal environmentplays an important role in determining the performance of monetary policy. The gains toprice level targeting typically found in the literature can be overturned at empirically relevantdebt-to-GDP ratios, when debt stabilization is achieved through spending cuts. In contrastthese gains are retained if the fiscal authorities utilize taxes to respond to shocks and stabilizedebt.
AB - The fiscal policy environment central banks operate in can be radically different withrespect to debt levels, maturity structures and whether or not fiscal adjustments are spendingortax-based. Despite this, most analyses of monetary policy delegation schemes typicallyignore the behavior of the fiscal policy maker. This paper investigates whether delegatingeither nominal income or price level targets to a monetary authority yields social gains inan economy with government debt, where the fiscal policymaker, acting strategically, maysupport or undermine the policies of the central bank. We argue that the fiscal environmentplays an important role in determining the performance of monetary policy. The gains toprice level targeting typically found in the literature can be overturned at empirically relevantdebt-to-GDP ratios, when debt stabilization is achieved through spending cuts. In contrastthese gains are retained if the fiscal authorities utilize taxes to respond to shocks and stabilizedebt.
KW - Monetary and Fiscal Policy Interactions
KW - Price Level Targeting
KW - Nominal Income Targeting
KW - Discretionary Policy
U2 - 10.1016/j.euroecorev.2017.02.011
DO - 10.1016/j.euroecorev.2017.02.011
M3 - Journal article
VL - 94
SP - 103
EP - 125
JO - European Economic Review
JF - European Economic Review
SN - 0014-2921
ER -