Monetary and fiscal policies under two alternative types of rules (Q1118515)

This paper considers the relative advantage of two types of monetary and fiscal feedback rules. When the private agents have full current information, the appropriate combination of monetary and fiscal feedback on past disturbances dominates the contemporaneous feedback in stabilizing the real output and the price level. This dominancy, however, disappears when the exchange rate stability is included in the objective function or when the currently observable variables are limited. In general, there exist some tradeoffs among feedback parameters. Some of the policy coefficients can be set arbitrarily, enabling the optimal policy rules to be specified in many equivalent ways.