Monetary Policy and Liquid Government Debt

38 Pages Posted: 13 Jun 2018

See all articles by David Andolfatto

David Andolfatto

Simon Fraser University (SFU) - Department of Economics; Federal Reserve Bank of St. Louis

Fernando M. Martin

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: 2018-01-16

Abstract

We examine the conduct of monetary policy in a world where the supply of outside money is controlled by the fiscal authority-a scenario increasingly relevant for many developed economies today. Central bank control over the long-run inflation rate depends on whether fiscal policy is Ricardian or Non-Ricardian. The optimal monetary policy follows a generalized Friedman rule that eliminates the liquidity premium on scarce treasury debt. We derive conditions for determinacy under both fiscal regimes and show that they do not necessarily correspond to the Taylor principle. In addition, Non-Ricardian regimes may suffer from multiplicity of steady-states when the government runs persistent deficits.

Keywords: monetary policy, in ation, Taylor rule, determinacy, Ri- cardian, liquid bonds

JEL Classification: E40, E52, E60, E63

Suggested Citation

Andolfatto, David and Martin, Fernando M., Monetary Policy and Liquid Government Debt (2018-01-16). FRB St. Louis Working Paper No. 2018-2, Available at SSRN: https://ssrn.com/abstract=3194989 or http://dx.doi.org/10.20955/wp.2018.002

David Andolfatto (Contact Author)

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
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604 291-5825 (Phone)
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Federal Reserve Bank of St. Louis ( email )

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Saint Louis, MO 63011
United States

Fernando M. Martin

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-7350 (Phone)

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