Monetary Policy with Declining Deficits: Theory and an Application to Recent Argentine Monetary Policy

By Rody Manuelli and Juan I. Vizcaino in Review. The authors study the nature of the optimal monetary policy in a regime of fiscal dominance when the monetary authority—which can print money or issue interest-earning debt—is required to finance an exogenous sequence of transfers to the Treasury. They show that the degree of commitment on the part of the monetary authority has a significant impact on the details of the optimal policy.

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