9 shows that the UK public debt is stable. Wrote the paper: MAB HAR CNJ JNS BP HES. and Leeper (2007) in accounting for monetary and fiscal policy interactions. where corresponds to the growth rate of the economy. Zagreb School of Economics and Management, Zagreb, 10000, Croatia, T1 - Essays on monetary and fiscal policy interaction. Subsequently, this leads to dissavings and lowering of investments which would depress output in the long run. The new UK conservative government, which took office in May 2010, changed the fiscal policy. However we found that the results were fruitless due to the limited quantity of available data and due to the fact that the coefficients of the equations were statistically insignificant. However, a general rule is that when monetary policy is capable of dealing with sticky price adjustment, a primary concern of fiscal authority should be to remedy the resource allocation. The inflation targeting regime in the United Kingdom was established in 1992 when the target was set at 2% per year (Bank of England ). , and Shone . In case of active fiscal policy and a passive monetary policy, when the economy faces an expansionary fiscal shock that raises the price level, money growth passively increases as well because the monetary authority is forced to accommodate these shocks. The second limitation of our paper is the simplified nature of our theoretical model. The monetary policy of the 1999–2002 period was characterized by high nominal interest rates of about 19% per year, which led to an increase in expenditure to service the public debt. Thus, in the next section, we use a model that relates public debt to the search of an inflation target by means of a real interest rate. In the section that follows, we perform simulations for Brazil and United Kingdom in order to observe the trajectory of the public debt and real interest rate, based on the model above. here. We also conducted several regressions in order to estimate the coefficients of the differential equation system presented in sec. If the monetary authority has high credibility, from the moment the announcement is made the agents will reduce their inflationary expectations, which will lead to a reduction in the cost of inflation. Developments in policy circles, and especially close to the OECD, led to a search for a strategic Also, fiscal policies are used to stabilize the terms of trade and maintain them at their natural levels. Professor Bertella acknowledges the support from São Paulo State University (UNESP) and São Paulo Research Foundation (FAPESP). Center for Polymer Studies and Department of Physics, Boston University, Boston, MA, 02215, United States of America, Affiliations No, Is the Subject Area "Macroeconomics" applicable to this article? Interactions between monetary and fiscal policy depend on the specification of policy variables that fiscal policy uses. Because the relationship between economic growth and real interest rate is negative, we set g = -0.86r. We used the value 0.86 because it is compatible with the 2013 growth rate of 1.8%. Disclaimer: This paper should not be reported as representing the views of the European Central Bank (ECB). They find that when there is a public announcement that an inflation target is going to be vigorously pursued, the agents’ (rational) expectations and their subsequent actions will contribute to the fulfillment of the target. This work has two limitations. The Theoretical Framework Like other NNS models, our model is characterized by optimizing agents, monopolistic competition, and nominal inertia. Both monetary and fiscal policy are macroeconomic tools used to manage or stimulate the economy. , the IT regime is the best monetary policy strategy because (i) it improves communication between the public and the monetary authorities and thus increases the agents’ capacity to forecast future inflation, and (ii) it disciplines the government’s monetary policy, thus giving it credibility. Mab HAR CNJ JNS BP HES December 2002, government gross debt was approximately 40 % of.! 0, then ( 18 ) T1 - Essays on monetary and fiscal policy which does include... - van Aarle, B. PY - 1996 be fiscal—increasing the primary surplus providing macroeconomic stability Lula da ’... Average interest rate decreases more probable under the it regime, United Kingdom ) only inflation and regaining.! 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