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Debt Stabilization Bias and the Taylor Principle :, Optimal Policy in a New Keynesian Model with Government Debt and Inflation Persistence, David Vines, Sven Jari Stehn

We analyse optimal monetary and fiscal policy in a New-Keynesian model with public debt and inflation persistence. Leith and Wren-Lewis (2007) have shown that optimal discretionary policy is subject to a 'debt stabilization bias' which requires debt to be returned to its pre-shock level. This finding has two important implications for optimal discretionary policy. Firstly, as Leith and Wren-Lewis have shown, optimal monetary policy in an economy with high steady-state debt cuts the interest rate in response to a cost-push shock - and therefore violates the Taylor principle. We show that this striking result is not true with high degrees of inflation persistence. Secondly, we show that optimal fiscal policy is more active under discretion than commitment at all degrees of inflation persistence and all levels of debt
Table Of Contents
Contents; I. Introduction; II. The Model; A. Consumers; B. Price Setting; C. Aggregate Demand; D. Fiscal Policy; E. The System; F. Social Welfare Function; G. Calibration; 1. The Proportion of Rule-of-Thumb Price Setters; 2. The Steady-State Value of Debt; III.Solving for Optimal Policy; A. Canonical Form; B. Optimal Policy under Commitment; 1. For Periods after the Initial (s > 0); 2. For the Initial Period (s = 0); 3. Solution; 4. Time Inconsistency; C. Optimal Policy under Discretion; IV.Simulating Optimal Policy; A. Optimal Policy under Commitment; 1. The Low Debt Economy; Tables
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (54 p.)
Specific Material Designation
Form Of Item

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