Monetary and fiscal policy interactions in a frictional model of fiat money, nominal public debt and banking

In this paper, we study the interactions between fiscal and monetary policy in a frictional economy where fiat money, bank deposits and short-term and long-term nominal government bonds coexist. Since agents face information frictions and bankers have limited commitment, bank deposits need to be collateralized with nominal public debt. These bank deposits can only be used as payment instruments in some states, while fiat money is always accepted. Within this frictional environment, we study monetary and fiscal policy interactions under different policy stances. When the monetary authority follows an active policy regime, a unique stationary equilibrium exists regardless of how the supply of the various nominal government bonds is specified. Under this policy regime, we also find that consumption inequality increases when the central bank pursues an expansionary monetary policy. In contrast, when the fiscal authority pursues active policies, real indeterminacies can exist. However, when the fiscal authority issues sufficiently few long-term (or short-term) bonds, a unique steady state exists. We also identify cases where an expansionary fiscal policy leads to a decline in consumption inequality between money transactions and deposit-backed transactions. Finally, regardless of the policy regime chosen by the government, financial innovations alter the relative demand for public debt and do not always lead to an increase in welfare. The financial innovations alter the underlying monetary and fiscal policy interactions and consumption inequality

Relationship Between Inflation and Real Economic Growth in Rwanda

peer reviewedThis study examines the impact of economic stability measures (inflation and unemployment rates) on real gross domestic product (GDP) in Rwanda. It uses quarterly data for the period of 2000Q1–2015Q4 collected from the Ministry of Finance and Economic Planning, Central Bank of Rwanda and the National Institute of Statistics of Rwanda (NISR). This study concludes that inflation and unemployment have a long-run negative and significant relationship on real gross domestic product. In the long run, the coefficients are not significant at the 5% level; it is only the inflation coefficient and error which are significant. Real gross domestic product increases when inflation reduces with a p-value of 0.00266; real gross domestic product increases when unemployment reduces with a p-value of 0.09882. The coefficient from the error correction model means that the effect of the shock will reduce by 0.0483% each quarter, meaning that the effect of the shock will reduce by 19.32% in each 4th quarter. This further means that it will end at 20 quarters, that is, after a five-year period. It has to be highlighted that there is a weak relationship between real gross domestic product and both inflation and unemployment rates