Monetary Policy and Public Finances: Inflation Targets in a New Perspective

IMF Working Papers, March 1, 1999

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Monetary Policy and Public Finances: Inflation Targets in a New Perspective

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Bibliographic details

• Authors: Christian H. Beddies
• Published: March 1, 1999
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451844368.001

Summary of core argument

• Paper considers the interaction between the private sector, the monetary authority, and the fiscal authority.
• Concludes that unrestricted central bank independence may not be an optimal way to:
  • collect seigniorage revenues, and
  • stabilize supply shocks.
• Shows that implementation of an optimal inflation target results in:
  • optimal shares of government finances—seigniorage, taxes, and the spending shortfall—from society’s point of view, but
  • still involves suboptimal stabilization.
• Notes that even if price stability is the sole central bank objective, a positive inflation target has important implications for:
  • the government’s finances, and
  • stabilization.

Key findings and implications

• Unrestricted central bank independence:
  • Is not necessarily optimal for seigniorage collection.
  • Is not necessarily optimal for stabilizing supply shocks.
• Optimal inflation targeting:
  • Aligns the shares of seigniorage, taxes, and the government spending shortfall with societal optimization.
  • Does not eliminate suboptimal stabilization outcomes.
• Price-stability-only mandate:
  • A positive inflation target still affects government finances and stabilization outcomes even when price stability is the central bank’s sole objective.

Thematic coverage (subjects and keywords)

• Subjects: Banking, Central bank autonomy, Central banks, Economic theory, Expenditure, Inflation, Inflation targeting, Monetary policy, Prices, Supply shocks
• Keywords: authorities move, budget constraint, central bank, Central bank autonomy, financing requirement, Inflation, inflation bias story, inflation response, Inflation targeting, inflation targets, loss function, optimization problem, Policy interaction, public finances, rate of inflation, seigniorage, Supply shocks, targeting regime, unanticipated inflation, WP

Content in this bundle

• Monetary Policy and Public Finances: Inflation Targets in a New Perspective - WP/99/26
  • Monetary Policy and Public Finances: Inflation Targets in a New Perspective - WP/99/26 (Markdown version)
  • Monetary Policy and Public Finances: Inflation Targets in a New Perspective - WP/99/26 (PDF)