The Stability and Growth Pact is under fire. Problems have appeared in sticking to the rules. Proposals to reform the Pact or ditch it altogether abound. But is the Pact a flawed fiscal rule? Against established criteria for an ideal fiscal rule, its design and compliance mechanisms fare reasonably well. Where weaknesses are found, they tend to reflect tradeoffs typical of supra-national arrang...

The goal of this paper is to compute optimal monetary and fiscal policy rules in a real business cycle model augmented with sticky prices, a demand for money, taxation, and stochastic government consumption. We consider simple policy rules whereby the nominal interest rate is set as a function of output and inflation, and taxes are set as a function of total government liabilities. We require p...

This paper examines how recent econometric policy evaluation research on monetary policy rules can be applied in a practical policymaking environment. According to this research, good policy rules typically call for changes in the federal funds rate in response to changes in the price level or changes in real income. An objective of the paper is to preserve the concept of such a policy rule in ...

Fiscal considerations and commitment drive the choice of monetary policy regime, especially for developing countries. I survey the fiscal foundations of price determination, and study the maximize-inflation-tax, interest rate rule, peg and currency board, and dollarization regime. Since nominal debt acts like equity for the government, the dollarization question is like the question whether a f...

This paper purports to apply the Kydland-Prescott framework of dynamic inconsistency to the case of fiscal policy, by considering the trade-off between output and debt stabilization. The Government budget constraint provides the link between debt dynamics and the level of activity, influenced by fiscal policy. Contrary to what happens in the monetary policy framework, however, a commitment is n...

This paper studies the effects of monetary policy rules in a monetary union. The focus of the analysis is on the interaction between the fiscal policy of member countries (regions) and the central monetary authority. When capital markets are integrated, the fiscal policy of one country will influence equilibrium wages and interest rates. Thus there are fiscal spillovers within a federation. The...

We characterize monetary and fiscal policy rules to implement optimal responses to a substantial decline in the natural rate of interest, and compare them with policy decisions made by the Japanese central bank and government in 1999—2004. First, we find that the Bank of Japan’s policy commitment to continuing monetary easing until some prespecified conditions are satisfied lacks history depend...

D iscussions of rules vs. discretion have occupied a central place in the analysis of macroeconomic policies in dynamic models. Costas Azariadis and Vincenzo Galasso have presented a new model that shows how a discretionary policy regime can lead to a more volatile fiscal policy than one pursued under a constitutional rule. They set up a simple fiscal policy story and examine the potential for ...