Seminar "Policy coordination and macroeconomic stability under sovereign risk"

Time: 13.00-14.00 hours
Location: CPB-office, Van Stolkweg 14, The Hague

Presentation: Jasper Lukkezen (CPB)

Discussant: Christiaan van der Kwaak (UvA)

Language: English

Registration:  Please register by sending an email to seminars@cpb.nl.

Abstract subject
In standard macroeconomic models, price stability and debt sustainability are achieved when monetary policy is “active”, and controls inflation, while fiscal policy is “passive”, and prevents explosive debt dynamics. This result holds regardless of the strength of the policy reaction. In the presence of sovereign risk however, a feedback between debt and inflation emerges. The ability of the central bank to maintain price stability then depends on the government’s effort to stabilise debt; the relative policy stance matters. Our results suggest that, in times of weak public finances, price stability and debt sustainability are more easily achieved when the government adopts a deficit target in addition to a debt target.

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