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

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  • Rodolfo E. Manuelli
  • Juan I. Vizcaino

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.

Suggested Citation

  • Rodolfo E. Manuelli & Juan I. Vizcaino, 2017. "Monetary Policy with Declining Deficits: Theory and an Application to Recent Argentine Monetary Policy," Review, Federal Reserve Bank of St. Louis, vol. 99(4), pages 351-375.
    • Handle: RePEc:fip:fedlrv:00090
    DOI: 10.20955/r.2017.351-375
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    References listed on IDEAS

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    3. Javier Diaz-Gimenez & Giorgia Giovannetti & Ramon Marimon & Pedro Teles, 2008. "Nominal Debt as a Burden on Monetary Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 493-514, July.
    4. Thomas J. Sargent & Neil Wallace, 1984. "Some Unpleasant Monetarist Arithmetic," Palgrave Macmillan Books, in: Brian Griffiths & Geoffrey E. Wood (ed.), Monetarism in the United Kingdom, pages 15-41, Palgrave Macmillan.
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    7. Matteo Mogliani & Giovanni Urga & Carlos Winograd, 2009. "Monetary disorder and financial regimes - The demand for money in Argentina, 1900-2006," PSE Working Papers halshs-00575107, HAL.
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    Cited by:

    1. Federico Sturzenegger, 2019. "Macri´s Macro: The meandering road to stability and growth," Working Papers 135, Universidad de San Andres, Departamento de Economia, revised Oct 2019.

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