Interest Rate Bounds and Fiscal Policy
14 Pages Posted: 9 May 2005
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: Suggested Citation