Fiscal Requirements for Price Stability

By Michael Woodford. 2001

914 citations recorded by the source corpus.

This paper argues that maintaining price stability requires not only commitment to an appropriate monetary policy rule, but an appropriate fiscal policy rule as well. 'Ricardian equivalence' does not imply that fiscal policy is irrelevant, except in the case of a certain class of policies (called 'Ricardian' policies). The role of fiscal developments in inflation determination under a non-Ricardian regime is illustrated through an analysis of the U.S. bond-price support regime of the 1940s. Several recent theoretical challenges to the logical possibility of a non-Ricardian regime are addressed, and a number of consequences are then drawn for the choice of policies to ensure price stability. An example of a monetary-fiscal regime with attractive properties would combine a 'Taylor rule' for monetary policy with nominal-deficit targeting as a fiscal policy commitment.

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Citations in the corpus

Macroeconomic Analysis Without the Rational Expectations Hypothesis (2013, background): “In this limiting case, there are no equilibrium fluctuations in πt or it, and the solutions for yt and bt+1 are given by yt = (β −1 − 1)(bt − st) + ψvst, (3.9) 28See Woodford (2001) for further discussion of the consequences of a “locally Ricardian” fiscal policy of this kind, under an REE analysis.”
Monetary/Fiscal Policy Mix and Agents’ Beliefs (2017, background): “Following Eusepi and Preston (2012) and Woodford (2001), we assume that there are two types of government bonds: One-period government bonds, Bst , in zero net supply with price P s t , and a more general portfolio of government bonds, Bmt , in non-zero net supply with price P m t .”
Monetary Conservatism and Fiscal Policy (2008, background): “An important strand of the literature, developed by Sargent and Wallace (1981), Leeper (1991), and Woodford (2001), studies monetary and fiscal policy interactions using policy rules, e.g., Schmitt-Grohé and Uribe (2004b) and Ferrero (2005).”
Money as stock (2005, methodology): “Therefore, we can determine the price level via the valuation equation for government debt, Nominal government debt Price level ¼ Expected present value of primary surpluses.”
Fluctuating Macro Policies and the Fiscal Theory [with Comments and Discussion] (2005, unknown): “The latter condition is equivalent to requiring that the present value of households’ planned expenditure is finite and that wealth accumulation satisfies the transversality condition [Woodford (2001)]: lim T→∞ Et [ qt,T AT PT ] = 0, (13) where At = Bt +Mt and qt,t+1 = Qt,t+1Pt+1/Pt. 3.2.”
"Unfunded Liabilities" and Uncertain Fiscal Financing (2010, unknown): “This equilibrium condition displays what Woodford (2001) calls “Ricardian” characteristics: for any given P0 there exists an expected present value of actual transfers that is consistent with equilibrium.”
How Important is Money in the Conduct of Monetary Policy (2006, unknown): “…regime under which the equilibrium price level is determined by fiscal policy, even though the central bank behaves in a way that is independent of the absolute level of prices; this is illustrated by the theory of the functioning of a wartime bond price-support regime proposed in Woodford (2001).”