Is a balanced-budget rule compatible with a government honoring its debt obligations? According to the conventional explanation, governments honor their debt obligations to maintain a good reputation for future borrowing. The ability to borrow is desirable because it allows for greater tax smoothing. However, a balanced-budget rule limits the ability to smooth taxes, rendering a large class of ...

Beginning with the Reserve Bank of New Zealand Act of 1989, central banking reforms have focused on assigning clear goals for which monetary policy authorities can be held accountable. Inflation targeting regimes provide examples of such goal-based policy frameworks. An alternative approach, recently argued for by John Taylor (2012, 2014), relies on a rule-based framework in which the policy au...

In this paper, we study Ramsey-optimal fiscal and monetary policy in a mediumscale model of the U.S. business cycle. The model features a rich array of real and nominal rigidities that have been identified in the recent empirical literature as salient in explaining observed aggregate fluctuations. The main result of the paper is that price stability appears to be a central goal of optimal monet...

The goal of this paper is to compute optimal monetary and fiscal policy rules in a real business cycle model augmented with sticky prices, a demand for money, taxation, and stochastic government consumption. We consider simple policy rules whereby the nominal interest rate is set as a function of output and inflation, and taxes are set as a function of total government liabilities. We require p...

We characterize Markov-perfect equilibria in a setting where the absence of government commitment affects the financing of productive public capital. We show that at any date, a government in office only considers intertemporal distortions over two consecutive periods in choosing taxes. We then use our framework to quantify the value of commitment, which we define as that obtained from binding ...

This paper assumes that output depends on a large number of variables, but that economic theory has only revealed a subset of these variables. The variables that determine output include exogenous shocks, as well as endogenous variables that depend on both the exogenous variables and agents’ expectations. This paper examines a policy maker’s attempts to forecast output under two different types...

We characterize monetary and fiscal policy rules to implement optimal responses to a substantial decline in the natural rate of interest, and compare them with policy decisions made by the Japanese central bank and government in 1999—2004. First, we find that the Bank of Japan’s policy commitment to continuing monetary easing until some prespecified conditions are satisfied lacks history depend...

This paper explores the similarity of the underlying economic problems that lead to the establishment of (a) independent central banks to operate national monetary policies and (b) independent regulatory agencies for telecommunications and other utility service industries. We show that, in both cases, the adoption of agencies independent of government results from the need to achieve credibilit...

On the Bilateral Trade Effects of Free Trade Agreements between the EU-15 and the CEEC-4 Countries The expansion of regionalism has spawned an extensive theoretical literature analysing the effects of Free Trade Agreements (FTAs) on trade flows. In this paper we focus on FTAs (also called European agreements) between the European Union (EU-15) and the Central and Eastern European countries (CEE...