Interest Rate Bounds and Fiscal Policy

14 Pages Posted: 9 May 2005

See all articles by Jagjit S. Chadha

Jagjit S. Chadha

University of St. Andrews - School of Management

Charles Nolan

University of St. Andrews

Abstract

When the monetary authority controls the short-term interest rate we find that under a regime of permanent (and even persistent but temporary) deficits that a strict upper bound on the feasible interest rate sequence is present. More generally, the satisfaction of the fiscal authority's present value budget constraint in the presence of a deficit sequence, means that monetary and fiscal decisions cannot be independent. This is an important caveat to the results in McCallum (1984).

Keywords: Intertemporal macro, monetary policy, fiscal policy interactions

JEL Classification: E63, E52, E31

Suggested Citation

Chadha, Jagjit S. and Nolan, Charles, Interest Rate Bounds and Fiscal Policy. Economics Letters, Vol. 84, pp. 9-15, July 2004. Available at SSRN: https://ssrn.com/abstract=717843

Jagjit S. Chadha

University of St. Andrews - School of Management ( email )

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St. Andrews, Fife KY16 9SS
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HOME PAGE: http://www.st-andrews.ac.uk/economics/staff/pages/j.chadha.shtml

Charles Nolan (Contact Author)

University of St. Andrews ( email )

North St
Saint Andrews, Fife KY16 9AJ
United Kingdom

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