Working Paper: CEPR ID: DP247
Authors: Andrew Blake; David Vines; Martin Weale
Abstract: This paper argues that a wealth target is an important feature of an economic policy package. A real exchange rate target can be used as an intermediate target to steer national wealth towards its desired value. Such a policy requires that fiscal policy be used to restrain inflation. This may be difficult if there is real wage resistance. In this instance, fiscal policy must be used to maintain national wealth, with monetary policy being used to restrain inflation. In this case also, monetary policy can be implemented by means of an exchange rate target. These arguments are demonstrated algebraically and then illustrated using policy rules designed for use on a model of the United Kingdom economy.
Keywords: exchange rate targets; macroeconomic policy; nominal GDP; national wealth; wage indexation
JEL Codes: 130; 311; 321; 431; 820
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary policy (E52) | inflation (E31) |
| fiscal policy (E62) | national wealth (F52) |
| real exchange rate target (F31) | national wealth (F52) |
| wage indexation (J38) | effectiveness of monetary policy (E52) |
| wage indexation (J38) | effectiveness of fiscal policy (E62) |
| structure of labour market (J40) | comparative advantage of fiscal versus monetary policy (E63) |
| degree of wage indexation (J38) | comparative advantage of fiscal versus monetary policy (E63) |