Template-Type: ReDIF-Paper 1.0
Author-Name: Rodolfo G. Campos
Author-X-Name-First: Rodolfo G.
Author-X-Name-Last: Campos
Author-Name: Jesús Fernández-Villaverde
Author-X-Name-First: Jesús
Author-X-Name-Last: Fernández-Villaverde
Author-Name: Galo Nuño Barrau
Author-X-Name-First: Galo
Author-X-Name-Last: Nuño Barrau
Author-Name: Peter Paz
Author-X-Name-First: Peter
Author-X-Name-Last: Paz
Title: Navigating by falling stars: monetary policy with fiscally driven natural rates
Abstract: We study a new type of monetary-fiscal interaction in a heterogeneous-agent New Keynesian model with a fiscal block. Due to household heterogeneity, the stock of public debt affects the natural interest rate, forcing the central bank to adapt its monetary policy rule to the fiscal stance to guarantee that inflation remains at its target. There is, however, a minimum level of debt below which the steady-state inflation deviates from its target due to the zero lower bound on nominal rates. We analyze the response to a debt-financed fiscal expansion and quantify the impact of different timings in the adaptation of the monetary policy rule, as well as the performance of alternative monetary policy rules that do not require an assessment of the natural rates. We validate our findings with a series of empirical estimates.
Creation-Date: 2024-03
File-URL: https://www.bis.org/publ/work1172.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1172.htm
File-Format: text/html
Number: 1172
Keywords: HANK models, natural rates, fiscal shocks
Classification-JEL: E32, E58, E63
Handle: RePEc:bis:biswps:1172