Infrequent fiscal stabilization

Yuting Bai and Tatiana Kirsanova

No 66983445, Working Papers from Lancaster University Management School, Economics Department

Abstract: This paper studies discretionary non-cooperative monetary and …fiscal policy stabilization in a New Keynesian model, where the …fiscal policymaker uses a distortionary tax as the policy instrument and operates with long periods between optimal time-consistent adjustments of the instrument. We demonstrate that longer …fiscal cycles result in stronger complementarities between the optimal actions of the monetary and …fiscal policymakers. When the …fiscal cycle is not very long, the complementarities lead to expectation traps. However, with a sufficiently long …fiscal cycle –one year in our model –no learnable time-consistent equilibrium exists. Constraining the …fiscal policymaker in its actions may help to avoid these adverse effects.

Keywords: Monetary and fiscal policy interactions; distortionary taxes; discretionary policy; LQ RE models (search for similar items in EconPapers)
JEL-codes: C61 E31 E52 E58 E61 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
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http://www.lancaster.ac.uk/media/lancaster-univers ... calStabilization.pdf (application/pdf)

Related works:
Working Paper: Infrequent Fiscal Stabilization (2013)
Working Paper: Infrequent Fiscal Stabilization (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:lan:wpaper:66983445

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