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High Trend Inflation and Passive Monetary Detours

Author

Listed:
  • Guido Ascari

    (Department of Economics, University of Oxford)

  • Anna Florio

    (Department of Management, Economics and Industrial Engineering, Politecnico di Milano)

  • Alessandro Gobbi

    (Department of Economics and Management, University of Pavia)

Abstract

According to the long-run Taylor principle (Davig and Leeper, 2007), a central bank can deviate to a passive monetary policy and still obtain determinacy if a sufficiently aggressive monetary policy is expected for the future. Does this principle hold true when both monetary and fiscal policies can switch and there is positive trend inflation? We find that passive monetary detours are no longer possible when trend inflation is high, whatever fiscal policy is in place. This has important policy implications in terms of flexibility and monetary-fiscal authorities coordination.

Suggested Citation

  • Guido Ascari & Anna Florio & Alessandro Gobbi, 2017. "High Trend Inflation and Passive Monetary Detours," DEM Working Papers Series 135, University of Pavia, Department of Economics and Management.
    • Handle: RePEc:pav:demwpp:demwp0135
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    More about this item

    Keywords

    trend inflation; monetary-fiscal policy interactions; Markov-switching; determinacy;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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