Nominal Targeting in an Economy with Government Debt

Bai, Yuting; Kirsanova, Tatiana; Leith, Campbell

doi:10.2139/ssrn.2641367

Cited by 3 publications

(5 citation statements)

References 51 publications

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“…The coupon decay parameter, ρ = 0.9596, corresponds to 5 years of government debt maturity, consistent with the data in many advanced economies [Eusepi and Preston (2013)]. In addition, I set the steady-state annualized debt-to-output ratio at 100%, which is currently around the average sovereign debt level in many advanced economies [Bai et al (2017)]. 20 Regarding the parameters characterizing the fiscal rule, following Davig and Leeper (2006) estimated for the United States, I set γ b and γ y at 0.136, 0.4596, respectively.…”

Section: Parameterizationsupporting

confidence: 62%

The Macroeconomic Impact of Monetary-Fiscal Policy in a “Fiscal Dominance” World

Jia

2018

Macroecon. Dynam.

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This paper focuses on the question of what monetary and fiscal policy can do and should do in a “fiscal dominance” world. I first highlight that both “amplification” and “fiscal cushion” effects are always at work jointly in determining the evolution of inflation. I find the threshold of maturity of government bonds beyond which more aggressive monetary policy dampens inflation volatility is three quarters. In addition, I conduct welfare analysis to quantitatively evaluate the costs and benefits brought by long-term debt. My results show that the threshold of government debt maturity above which an aggressive monetary policy improves welfare is eight quarters. More importantly, I characterize optimal monetary and fiscal policy using simple and implementable rules. My results indicate an optimal monetary and fiscal combination calls for an aggressive response in both rules. Finally, I find that optimized simple monetary-fiscal rule is significantly welfare inferior to the Ramsey optimal policy.

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Section: Parameterizationsupporting

confidence: 62%

The Macroeconomic Impact of Monetary-Fiscal Policy in a “Fiscal Dominance” World

Jia

2018

Macroecon. Dynam.

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“…3. A classic reference for this approach is Currie and Levine (1993), while recent examples include Pilcher (2011), Niemann et al (2013a), Adam and Billi (2014), Chen et al (2017), andBai et al (2017).…”

Section: Discussionmentioning

confidence: 99%

Political Conflict and Bargaining in a New Keynesian Model of Fiscal Stabilization

Flamini

Leith

2020

Macroecon. Dynam.

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Recent work on optimal monetary and fiscal policy in New Keynesian models has tended to focus on policy set by an infinitely lived benevolent policy maker, often with access to a commitment technology. In this paper, we explore deviations from this ideal, by allowing (time-consistent) policy to be set by a process of bargaining between two political players with different weights on elements of the social welfare function. We characterize the (linear) Markov perfect equilibrium and, in a series of numerical examples, we explore the resultant policy response to shocks which cannot be perfectly offset with the available instruments due to their fiscal consequences. We find that, even although the players, on average, have the socially desirable objective function, the process of bargaining implies an outcome which deviates from the time-consistent policy chosen by the benevolent policy maker. Moreover, the range of instruments available mean that policy makers will bargain across the entire policy mix, sometimes implying outcomes which are quite different from those that would be chosen by a single policy maker. These policy outcomes depend crucially on the nature of the conflict and also the level of government debt.

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“…See, for example, Bean (1983), West (1986), Frankel (1990), Feldstein and Stock (1994), Hall and Mankiw (1994), among others. In the wake of the GFC, there has been a revival of proposals that central banks should consider targeting the nominal GDP level, including Sumner (2012Sumner ( , 2014, Woodford (2012), Frankel (2013; and more recently, Armenter (2017), Bai, Kirsanova, and Leith (2017), Bhandari and Frankel (2017), Billi (2017), Murphy and Chen (2017), Waters (2017), and Chen (2018).…”

Section: I1 Backgroundmentioning

confidence: 99%

“…Murphy and Chen (2017) conduct an empirical investigation into the optimal size of the NGDP target and level targeting. Bai et al (2017) study NGDP targeting in an economy with government debt. Chen (2018) analyzes the impact of NGDP targeting on the labour market.…”

Section: I1 Backgroundmentioning

confidence: 99%

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Nominal GDP Targeting and Central Bank Conservativeness

Dai

2019

Bulletin of Econ Res

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In the literature on monetary economics, there is the ‘inflationary bias’ result which predicts that the rate of inflation will be biased towards a higher level under discretionary monetary policy than under a rule‐based policy regime. It is established that a credible nominal target can eliminate this ‘inflationary bias’. In this paper, we examine the case of nominal GDP targeting, which is a rule‐based monetary regime. Depending on the degree of conservativeness by the central bank, we show in a stylized model the choice of different combination of inflation and real GDP targets can still result in an ‘inflationary bias’, and there also exists the possibility of a ‘dis‐inflationary bias’.

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Nominal Targeting in an Economy with Government Debt

Cited by 3 publications

References 51 publications

The Macroeconomic Impact of Monetary-Fiscal Policy in a “Fiscal Dominance” World

The Macroeconomic Impact of Monetary-Fiscal Policy in a “Fiscal Dominance” World

Political Conflict and Bargaining in a New Keynesian Model of Fiscal Stabilization

Nominal GDP Targeting and Central Bank Conservativeness

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