%0 Journal Article
%T Disinflation, external vulnerability, and fiscal intransigence: some unpleasant Mundellian arithmetic
%A Evan C. Tanner
%J Journal of Applied Economics
%D 2019
%R https://doi.org/10.1080/15140326.2019.1644718
%X ABSTRACT This paper examines the policy challenges that a country faces when it wants to both reduce inflation and maintain a sustainable external position. Robert Mundell¡¯s policy assignment framework suggests that these two goals may be mutually incompatible unless monetary and fiscal policies are properly coordinated. Unfortunately, if the fiscal authority is unwilling to cooperate ¨C a case of fiscal intransigence ¨C and central banks pursue a disinflation on a ¡°go it alone¡± basis, their country¡¯s external position may further deteriorate. A dynamic analysis shows that if the central bank itself lacks credibility, it must rely even more on cooperation from the fiscal authority. The paper thus extends Sargent and Wallace¡¯s ¡°unpleasant monetarist arithmetic¡± to an open economy: a central bank¡¯s efforts to stabilize prices and output using a ¡°go it alone¡± strategy (no help from the fiscal) may be thwarted by external factors: more external debt, higher risk premia and exchange rate passthrough
%U https://www.tandfonline.com/doi/full/10.1080/15140326.2019.1644718