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INIZIO_TESTO_DA_INDICIZZARE
UNITA' DI RICERCA
Research program
Monetary and Fiscal Stabilization policies, the exchange rate and the term structure of interest rates
University Co-ordinator
Università degli Studi di ROMA "Tor Vergata" -
ECONOMIA E ISTITUZIONI - ROMA(RM)
Research Unit Leader
Pietro SENESI
Description
The main objective of the research is to study the interaction between fiscal and monetary policy. Particular emphasis will be given to the effects of large government debt and deficits on price stability and on the implications optimal monetary policy design. More specifically, we attempt to quantify the effects of fiscal policy on the price level and on exchange rates, in order to determine how optimal monetary policy should take into account changes in fiscal variables. In particular we will proceed in three steps.First, we intend to build a basic framework of to analyse both theoretically and empirically the inflationary consequences of government deficits and of slow adjustment towards sound fiscal positions. Dynamic simulations will then be used to evaluate if a low progress in fiscal consolidation is indeed to blame for both inflation and unsatisfactory economic performances.Second, we seek to provide theoretical and empirical foundations to the view that fiscal variables should be taken into account in the design of optimal monetary policy rules. An important point to verify is whether the standard Taylor principle still holds when wealth effects are taken into account. The final objective is to derive an optimal interest rate feedback rule reflecting also the dynamics of fiscal variables. The stabilisation properties of the monetary rule proposed will be evaluated by implementing dynamic simulations.Third, the model will also be extended to an open economy in order to study the role played by fiscal variables in the determination of nominal and real exchange rates. A general equilibrium model, linking exchange rate dynamics to current and especially prospective budget deficits will be constructed along the lines of the model presented in Marini and Piersanti [4], which showed that currency crises can be largely explained by expectations of future fiscal deficits. The theoretical implications of the model will be derived and empirically tested, the basic idea being that prospective budget deficits could drive exchange rate depreciation.
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