Revisiting Public Debt and Inflation: Fiscal Implications of an Independent Central Banker

No 31, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: The mainstream literature on monetary policy games under output persistence posits that: a) monetary regimes do not affect real variables in the steady state; b) optimal institutional design should entirely remove the inflation bias. We show that neither result necessarily holds if output persistence originates from debt dynamics and distortionary taxation. First, monetary delegation induces a strategic use of debt policy affecting steady-state distortions. Second, the reduction of such distortions may require monetary institutions that tolerate an inflation rate above the socially optimal level.

Pages: 33 pages
Date: 2000-11, Revised 2000-11
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Persistent link: https://EconPapers.repec.org/RePEc:mib:wpaper:31

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