Optimal fiscal feedback on debt in an economy with nominal rigidities

Kirsanova, T. and Wren-Lewis, S. (2012) Optimal fiscal feedback on debt in an economy with nominal rigidities. Economic Journal, 122(559), pp. 238-264. (doi: 10.1111/j.1468-0297.2011.02458.x)

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Publisher's URL: http://dx.doi.org/10.1111/j.1468-0297.2011.02458.x


We examine the impact of different degrees of fiscal feedback on debt when monetary policy is determined optimally, rather than following a simple rule. We find the welfare maximising level of fiscal feedback to be small. We show for the first time a clear discontinuity in the behaviour of monetary policy and welfare either side of this optimal level. As fiscal feedback increases, optimal monetary policy becomes less active because fiscal feedback tends to deflate inflationary shocks. If fiscal feedback falls below some critical value, monetary policy becomes strongly passive and this leads to a sharp deterioration in welfare.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Kirsanova, Professor Tatiana
Authors: Kirsanova, T., and Wren-Lewis, S.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Economic Journal

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