Optimal simple rules for the conduct of monetary and fiscal policy

Jagjit S. Chadha, Charles Nolan

    Research output: Contribution to journalArticlepeer-review

    28 Citations (Scopus)

    Abstract

    Stabilization policy involves joint monetary and fiscal rules. We develop a model enabling us to characterize systematic simple monetary and fiscal policy over the business cycle. We principally focus on the following question. What are the key properties of the joint simple rule governing the conduct of systematic stabilization policy? We find that conducting stabilization policy incorporates not only a set of monetary policy choices governed by the so-called 'Taylor principle' but also fiscal policy that gives considerable force to automatic stabilizers. Recent US and UK monetary and fiscal choices seem broadly consistent with this model. This result is found to be robust to a number of alternate modeling strategies. (c) 2007 Elsevier Inc. All rights reserved.

    Original languageEnglish
    Pages (from-to)665-689
    Number of pages25
    JournalJournal of Macroeconomics
    Volume29
    Issue number4
    DOIs
    Publication statusPublished - Dec 2007

    Keywords

    • optimal simple rules
    • monetary and fiscal policy
    • finite lives
    • SHOCKS

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