Journal Article

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

Abstract: 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. They apply this model to the recent experience of Argentina and find that the inflation rate experienced by Argentina during the first year of the monetary program is close to the predictions of a weakly time-consistent solution. Moreover, consistent with both versions of their model?full commitment and weak time consistency?the Central Bank of Argentina has increased the ratio of interest-earning debt relative to the monetary base.

https://doi.org/10.20955/r.2017.351-375

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Review

Publication Date: 2017

Volume: 99

Issue: 4

Pages: 351-375