The Dire Effects of the Lack of Monetary and Fiscal Coordination

Francesco Bianchi and Leonardo Melosi

No WP-2017-19, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: What happens if the government?s willingness to stabilize a large stock of debt is waning, while the central bank is adamant about preventing a rise in inflation? The large fiscal imbalance brings about inflationary pressures, triggering a monetary tightening, further debt accumulation, and additional inflationary pressure. Thus, the economy will go through a spiral of higher inflation, output contraction, and further debt accumulation. A coordinated commitment to inflate away the portion of debt resulting from a large recession leads to better macroeconomic outcomes by separating the issue of long-run fiscal sustainability from the need for short-run fiscal stabilization. This strategy can also be used to rule out episodes in which the central bank becomes constrained by the zero lower bound.

Keywords: Monetary and fiscal policies; coordination; emergency budget; Markov-switching models; liquidity traps (search for similar items in EconPapers)
JEL-codes: D83 E31 E5 E62 E63 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2017-07-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: The dire effects of the lack of monetary and fiscal coordination (2019)
Working Paper: The Dire Effects of the Lack of Monetary and Fiscal Coordination (2017)
Working Paper: The Dire Effects of the Lack of Monetary and Fiscal Coordination (2017)
Working Paper: The Dire Effects of the Lack of Monetary and Fiscal Coordination (2017)
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