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Debt Stabilization Bias and the Taylor Principle: Optimal Policy in a New Keynesian Model with Government Debt and Inflation Persistence.

Abstract:

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 r...

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Publisher:
International Monetary Fund
Series:
IMF Working Papers
Publication date:
2007-01-01
Language:
English
UUID:
uuid:8a66976c-429f-43f5-9150-c894d26fb86e
Local pid:
oai:economics.ouls.ox.ac.uk:11984
Deposit date:
2011-08-16

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