Gradualism in monetary policy and fiscal equilibrium

Abstract

Purpose

This paper aims to study a monetary policy problem, where concerns with price stability and with the impact of interest rates on public debt are simultaneously addressed.

Design/methodology/approach

The problem is analytically approached under a new Keynesian monetary policy framework to which a budget constraint is added and, subsequently, the model's implications are empirically illustrated by characterizing Brazilian policies.

Findings

The findings denote the existence of a trade‐off between inflation target and public debt stability. Therefore the determination of an inflation target cannot neglect this trade‐off. Furthermore, the empirical analysis from the Brazilian case shows that the Central Bank of Brazil takes into consideration public debt when determining the interest rate.

Practical implications

The determination of the interest rate in an inflation targeting regime must consider the public debt stability.

Originality/value

This paper makes a contribution on the theme of consistency between monetary policy and fiscal equilibrium.

Citation

Ferreira de Mendonça, H. and Carlos de Castro Pires, M. (2010), "Gradualism in monetary policy and fiscal equilibrium", Journal of Economic Studies, Vol. 37 No. 3, pp. 327-342. https://doi.org/10.1108/01443581011061302