01990cas a2200253 a 4500 AALejournalIMF009504 230101c9999 xx r poo 0 0eng d 5.00 USD 9781451867701 1018-5941 BD-DhAAL BD-DhAAL Vines, David. Debt Stabilization Bias and the Taylor Principle : Optimal Policy in a New Keynesian Model with Government Debt and Inflation Persistence / David Vines, Sven Jari Stehn. Washington, D.C. : International Monetary Fund, 2007. 1 online resource (52 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students We analyse optimal monetary and fiscal policy in a New-Keynesian model with public debt and inflation persistence. Leith and Wren-Lewis (2007) have shown that optimal discretionary policy is subject to a 'debt stabilization bias' which requires debt to be returned to its pre-shock level. This finding has two important implications for optimal discretionary policy. Firstly, as Leith and Wren-Lewis have shown, optimal monetary policy in an economy with high steady-state debt cuts the interest rate in response to a cost-push shock - and therefore violates the Taylor principle. We show that this striking result is not true with high degrees of inflation persistence. Secondly, we show that optimal fiscal policy is more active under discretion than commitment at all degrees of inflation persistence and all levels of debt. Mode of access: Internet Stehn, Sven Jari. IMF Working Papers; Working Paper ; No. 2007/206 Full text available on IMF http://elibrary.imf.org/view/journals/001/2007/206/001.2007.issue-206-en.xml IMF e-Library