This paper aims to study a monetary policy problem, where concerns with price stability and with the impact of interest rates on public debt are simultaneously addressed.
The problem is analytically approached under a new Keynesian monetary policy framework to which a budget constraint is added and, subsequently, the model's implications are empirically illustrated by characterizing Brazilian policies.
The findings denote the existence of a trade‐off between inflation target and public debt stability. Therefore the determination of an inflation target cannot neglect this trade‐off. Furthermore, the empirical analysis from the Brazilian case shows that the Central Bank of Brazil takes into consideration public debt when determining the interest rate.
The determination of the interest rate in an inflation targeting regime must consider the public debt stability.
This paper makes a contribution on the theme of consistency between monetary policy and fiscal equilibrium.
