ابزار بانک مرکزی، رژیم سیاست های مالی، و الزامات مورد نیاز برای تعیین تعادل

This paper examines the role of the monetary instrument choice for local equilibrium determinacy under sticky prices and different fiscal policy regimes. Corresponding to Benhabib et al.'s results for interest rate feedback rules [Benhabib, J., Schmitt-Grohé, S., Uribe, M., 2001. Monetary policy and multiple equilibria. American Economic Review 91, 167–185], the money growth rate should not rise by more than one for one with inflation when the primary surplus is raised with public debt. Under an exogenous primary surplus, money supply should be accommodating—such that real balances grow with inflation—to ensure local equilibrium determinacy. When the central bank links the supply of money to government bonds by controlling the bond-to-money ratio, an inflation stabilizing policy can be implemented for both fiscal policy regimes. Local determinacy is then ensured when the bond-to-money ratio is not extremely sensitive to inflation, or when interest payments on public debt are entirely tax financed, i.e., the budget is balanced.

The central bank can conduct monetary stabilization policy by using different instruments. The choice of a particular instrument can affect its ability to stabilize macroeconomic aggregates and can thus matter for social welfare. This has been shown by Poole (1970), Sargent andWallace (1975), and, more recently, by Carlstrom and Fuerst (1995), Gavin et al. (2005), and Collard and Dellas (2005). These studies do not lead to an unambiguous conclusion about which instrument to prefer. Yet, contemporary research on monetary policy primarily focuses on the analysis of interest rate rules. One major question in this literature is how particular interest rate feedback rules affect local equilibrium determinacy under different specifications of preferences, markets, and technologies.1 Other studies have shown that equilibrium determinacy is to an important extent affected by interactions between monetary and fiscal policy. Seminal contributions to this literature are Leeper (1991), Sims (1994), and Woodford (1994, 1995), which have established the ‘Fiscal Theory of the Price Level’ (FTPL).2 According to the FTPL, the price level can be determined by the needs of government solvency when monetary policy fails to provide a nominal anchor. When prices are sticky, fiscal policy can further be crucial for existence and uniqueness of the equilibrium allocation, and can severely constrain the conduct of interest rate policy, as shown by Benhabib et al. (2001). This paper combines the two strands of research, and analyzes the fiscal policy impact on the determination of local equilibrium paths for cases where the central bank applies instruments other than the interest rate. As the main novel contribution to the literature, this paper examines local equilibrium determinacy under staggered price setting when the central bank adjusts the supply of money in response to changes in inflation under different fiscal policy regimes.3 We consider the cases where the central bank controls the supply of money either according to a money growth rate rule or according to a rule that links the outstanding stocks of money and government bonds. Like in Benhabib et al. (2001), we further consider fiscal policy regimes that differ with regard to the feedback from public debt to the primary surplus.We find that when the central bank follows a money growth feedback rule, the fiscal stance is decisive for the way the central bank has to adjust the money growth rate in order to ensure local uniqueness of equilibrium. If the primary surplus rises with debt, the government finance decision is irrelevant for the equilibrium allocation and the price system. Local equilibrium determinacy then requires the money growth rate to rise by less than one for one with inflation, implying that real balances decrease with inflation. If the fiscal policy regime is instead characterized by an exogenous primary surplus, fiscal policy matters and government solvency imposes a relevant restriction on the price level and (due to sticky prices) on the equilibrium allocation. Under this fiscal policy regime local equilibrium determinacy requires real balances to increase with inflation, such that unstable debt dynamics are avoided by an accommodating money supply, which devaluates debt. This corresponds to Benhabib et al.’s (2001) result that interest rate policy should be passive when the primary surplus is exogenous. The conclusions regarding the requirements for local equilibrium determinacy and the role of fiscal policy fundamentally change when the central bank supplies money contingent on the outstanding stock of government bonds.4 By using the ratio of outstanding bonds to money as its operating target, the central bank links the stocks of public liabilities that are typically traded in open market operations. As long as the bond-to-money ratio is finite, government solvency is guaranteed for both fiscal policy regimes. Since money supply is linked to government bonds, a change in the latter affects households’ willingness to consume, such that fiscal policy is nonneutral. Thus, the equilibrium allocation and the price system depend on the evolution of debt, and real financial wealth becomes a relevant predetermined state variable. Local equilibrium determinacy is ensured if the bond-to-money ratio is not strongly raised in response to higher inflation, or if the fiscal authority conducts a balance budget policy. The evolution of real wealth then exerts a stabilizing impact, as it avoids indeterminacy or unstable dynamics. Hence, fiscal policy can impose substantial restrictions on the conduct of monetary policy if the central bank controls the nominal interest rate or the money growth rate. If the primary surplus is exogenous, the central bank should abstain from a strong monetary tightening whenever inflation rises. Such a policy, which would stabilize inflation when debt is neutral, leads to local indeterminacy or instability when debt interest payments are not tax financed. In this case, money growth policy should instead accommodate inflation and interest rate policy should be passive, which both allow for strong inflation fluctuations and therefore lead to welfare costs due to the price rigidity. In contrast, a bond-to-money policy can always be conducted in a way that is consistent with the aim to stabilize inflation in the short-run. However, fiscal policy then affects the long-run inflation rate and therefore the welfare costs due to average price changes. These can be minimized by a balanced budget policy, which further guarantees local equilibrium determinacy for any positive bond-to-money ratio. The paper is organized as follows. Section 2 presents the model. In the first part of Section 3, we briefly examine price level determination and conditions for local determinacy of equilibrium paths under flexible prices, which have until now not been analyzed for the two money supply regimes. In Section 4, we derive conditions for local equilibrium determinacy under sticky prices. Section 5 concludes.

The literature on monetary policy and equilibrium determination has shown that the central banks’ operating procedure should respect the particular fiscal policy stance in order to avoid equilibrium indeterminacy. Whether a central bank that controls the nominal interest rate should react moderately rather than strongly to changes in inflation, depends on the response of the primary surplus to changes in public debt. If the primary surplus is raised with public debt, fiscal policy is neutral, and interest rate policy should actively stabilize inflation. If, however, the primary surplus is exogenous, such that fiscal policy does not ensure public sector solvency, interest rates should passively be adjusted. Thus, the requirements for a stabilizing interest rate policy under both fiscal policy regimes are incompatible. This well-known principle is shown to apply in a corresponding way when the central bank sets the money growth rate contingent on changes in inflation. A successful stabilization of inflation by the central bank relies on a primary surplus that rises with debt. If, however, the primary surplus is exogenous, necessary devaluations of growing nominal debt requires the central bank to supply money in an accommodating way, such that nominal and real money balances grow with higher inflation. While the determinacy implications of interest rate policy and money growth policy crucially depend on the particular fiscal policy, it is shown that the central bank can avoid being strongly constrained by fiscal policy under an alternative operating target. When the central bank links the supply of money to the outstanding stock of bonds, the fiscal stance generally matters for the allocation and the price system. Put differently, by controlling the ratio of both types of government liabilities, monetary policy induces public debt to be non-neutral, which under the former monetary regimes has only been the case for an exogenous primary surplus. When the central bank controls the bond-to-money ratio, government solvency can be ensured for both types of fiscal policy. Moreover, the central bank is then hardly restricted by the requirements for local equilibrium determinacy, such that monetary policy can be conducted in an inflation stabilizing way. However, fiscal policy has an impact on long-run inflation and therefore on the average welfare costs of price rigidity. When taxes cover all interest payments on public debt, such that the budget is permanently balanced, long-run price stability as well as local equilibrium determinacy are guaranteed.