Fiscal inflation and cosmetic defaults in a small open economy

For a small open economy, maintaining a stable exchange rate and moderate levels of inflation is often a goal of primary importance. At the same time, the profession has recognized the tight link between fiscal and monetary policies in determining inflation dynamics. Thus, the goal of a stable excha...

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Autor principal:	Bianchi, Francesco
Formato:	Artículo
Lenguaje:	English
Publicado:	Banco Central de Chile 2021
Materias:	INFLACIÓN TIPO DE CAMBIO POLÍTICA MONETARIA POLÍTICA FISCAL
Acceso en línea:	https://hdl.handle.net/20.500.12580/6138
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spelling	oai-20.500.12580-61382021-10-19T16:01:20Z Fiscal inflation and cosmetic defaults in a small open economy Bianchi, Francesco INFLACIÓN TIPO DE CAMBIO POLÍTICA MONETARIA POLÍTICA FISCAL For a small open economy, maintaining a stable exchange rate and moderate levels of inflation is often a goal of primary importance. At the same time, the profession has recognized the tight link between fiscal and monetary policies in determining inflation dynamics. Thus, the goal of a stable exchange rate requires a certain level of coordination between the monetary and fiscal authorities. This paper builds on recent advancements in the literature on monetary-fiscal policy interaction to formalize this idea. We study the origins of fiscal inflation, the possibility of stagflation as a result of policy uncertainty, and the role of default on sovereign debt crises that stem from lack of fiscal discipline. We then use the model to interpret the different periods of the Chilean economic history starting from the 1960s. For a small open economy, maintaining a stable exchange rate and moderate levels of inflation is often a goal of primary importance. At the same time, the profession has recognized the tight link between fiscal and monetary policies in determining inflation dynamics. Thus, the goal of a stable exchange rate requires a certain level of coordination between the monetary and fiscal authorities. This paper builds on recent advancements in the literature on monetary-fiscal policy interaction to formalize this idea. We study the origins of fiscal inflation, the possibility of stagflation as a result of policy uncertainty, and the role of default on sovereign debt crises that stem from lack of fiscal discipline. We then use the model to interpret the different periods of the Chilean economic history starting from the 1960s. 2021-10-19T15:56:34Z 2021-10-19T15:56:34Z 2021-10 Artículo 978-956-7421-69-5 978-956-7421-70-1 (pdf) 0717-6686 https://hdl.handle.net/20.500.12580/6138 en Series on Central Banking Analysis and Economic Policies; no. 28 Serie Banca Central, análisis y políticas económicas; no. 28 Attribution-NonCommercial-NoDerivs 3.0 Chile http://creativecommons.org/licenses/by-nc-nd/3.0/cl/ .pdf Sección o Parte de un Documento p. 185-228 application/pdf Banco Central de Chile
institution	Banco Central
collection	Banco Central
language	English
topic	INFLACIÓN TIPO DE CAMBIO POLÍTICA MONETARIA POLÍTICA FISCAL
spellingShingle	INFLACIÓN TIPO DE CAMBIO POLÍTICA MONETARIA POLÍTICA FISCAL Bianchi, Francesco Fiscal inflation and cosmetic defaults in a small open economy
description	For a small open economy, maintaining a stable exchange rate and moderate levels of inflation is often a goal of primary importance. At the same time, the profession has recognized the tight link between fiscal and monetary policies in determining inflation dynamics. Thus, the goal of a stable exchange rate requires a certain level of coordination between the monetary and fiscal authorities. This paper builds on recent advancements in the literature on monetary-fiscal policy interaction to formalize this idea. We study the origins of fiscal inflation, the possibility of stagflation as a result of policy uncertainty, and the role of default on sovereign debt crises that stem from lack of fiscal discipline. We then use the model to interpret the different periods of the Chilean economic history starting from the 1960s.
format	Artículo
author	Bianchi, Francesco
author_facet	Bianchi, Francesco
author_sort	Bianchi, Francesco
title	Fiscal inflation and cosmetic defaults in a small open economy
title_short	Fiscal inflation and cosmetic defaults in a small open economy
title_full	Fiscal inflation and cosmetic defaults in a small open economy
title_fullStr	Fiscal inflation and cosmetic defaults in a small open economy
title_full_unstemmed	Fiscal inflation and cosmetic defaults in a small open economy
title_sort	fiscal inflation and cosmetic defaults in a small open economy
publisher	Banco Central de Chile
publishDate	2021
url	https://hdl.handle.net/20.500.12580/6138
work_keys_str_mv	AT bianchifrancesco fiscalinflationandcosmeticdefaultsinasmallopeneconomy
_version_	1718433340741124096

Fiscal inflation and cosmetic defaults in a small open economy

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