Fiscal versus monetary rules

Abstract

In recent years policy-makers have been confronted with the twin tasks of reducing the pace of inflation and attempting to stabilise the economy, while these very problems make the outcome of their policies less certain. An attempt to break this vicious circle has been the adoption, in several countries, of publicly announced monetary targets. In 1976 the British Government provided publicly quantified targets for not one but three different variables: the public sector deficit, money supply, and domestic credit. Not surprisingly, this strategy based on multiple targets raises a host of questions. The present article tackles some of these questions by examining, first, the assumptions that lead to a rule for each of the three variables. Then the author quantifies their differences with a simulation experiment, using a simplified macroeconomic model capable of reproducing  the main features of those opposite approaches.

JEL: E63, E44, E52