@article{Implications:1485,
      recid = {1485},
      author = {De Resende, Carlos and Rebei, Nooman},
      title = {The Welfare Implications of Fiscal Dominance},
      publisher = {Bank of Canada},
      address = {2008},
      pages = {1 online resource (iv, 39 pages)},
      abstract = {This paper studies the interdependence between fiscal and  monetary policy in a DSGE model with sticky prices and  non-zero trend inflation. We characterize the fiscal and  monetary policies by a rule whereby a given fraction k of  the government debt must be backed by the discounted value  of current and future primary surpluses. The remaining  fraction of debt is backed by seigniorage revenues. When k  = 1, there is no fiscal dominance, since the fiscal  authority backs all debt and accommodates (independent)  monetary policy, by adjusting current or future primary  surpluses to satisfy the government’s intertemporal budget  constraint. If k = 0, all debt is backed by the monetary  authority and there is complete fiscal dominance. A  continuum of possibilities lies between these two polar  cases. We numerically show that: 1) the degree of fiscal  dominance, as measured by (1 – k), is positively related to  trend inflation, and 2) when prices are sticky, k has  significant effects on the business cycle dynamics. The  model is estimated using Bayesian techniques. Estimates of  k imply a high degree of fiscal dominance in both Mexico  and South Korea, but almost no fiscal dominance in Canada  and the U.S. The country-specific estimates of the  structural parameters are used in a second-order  approximation of the equilibrium around the deterministic  steady-state to evaluate the welfare costs of fiscal  dominance. Results suggest significant welfare losses for  countries with high degrees of fiscal dominance.},
      url = {http://www.oar-rao.bank-banque-canada.ca/record/1485},
      doi = {https://doi.org/10.34989/swp-2008-28},
}