The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
This paper develops a simple framework to examine the budgetary implications of monetary policy measures. It further outlines, using this framework, the various channels of influence that tight monetary policy may have on the budget deficit. The cumulative effect might be quantitatively large although each effect might be small. Most of the effects tend to increase the budget deficit as result of tight monetary policy, but tight monetary policy causes a short-run decrease in the government debt. Thus, macroeconomic policy coordination should be considered.