Disinflation, External Vulnerability, and Fiscal Intransigence : Some Unpleasant Mundellian Arithmetic

This paper examines the policy challenges a country faces when it wants to both reduce inflation and maintain a sustainable external position. Mundell's (1962) policy assignment framework suggests that these two goals may be mutually incompatible unless monetary and fiscal policies are properly...

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Main Author: Tanner, Evan C.
Format: eBook
Language:English
Published: Washington, D.C. International Monetary Fund 2017, 2017
Series:IMF Working Papers
Subjects:
Online Access:
Collection: International Monetary Fund - Collection details see MPG.ReNa
Summary:This paper examines the policy challenges a country faces when it wants to both reduce inflation and maintain a sustainable external position. Mundell's (1962) policy assignment framework suggests that these two goals may be mutually incompatible unless monetary and fiscal policies are properly coordinated. Unfortunately, if the fiscal authority is unwilling to cooperate-a case of fiscal intransigence-central banks that pursue a disinflation on a 'go it alone' basis will cause the country's external position to further deteriorate. A dynamic analysis shows that if the central bank itself lacks credibility in its inflation goal, it must rely even more on cooperation from the fiscal authority than otherwise. Echoing Sargent and Wallace's (1981) 'unpleasant monetarist arithmetic,' in these circumstances, a 'go it alone' policy may successfully stabilize prices and output, but only on a short-term basis
Physical Description:34 p.
ISBN:1484300645
9781484300640