Monetary and Fiscal Policy Interactions in a Frictional Model of Money, Nominal Public Debt and Banking

Saroj Dhital (), Pedro Gomis-Porqueras and Joseph Haslag

No 2002, Working Papers from Department of Economics, University of Missouri

Abstract: In this paper we examine the interactions between fiscal and monetary policy in an economy with financial frictions, where fiat money, bank deposits and short and long-term nominal bonds coex-ist. Because agents face information frictions and bankers have limited commitment, fiat money is always accepted and bank deposits can be used in some trades. Within this frictional environment, we study how consumption inequality varies when the central bank pursues an active monetary pol-icy and when the fiscal authority is active. Specifically, we find that consumption wedges across the different states of the world are more severe when an active central bank pursues expansionary monetary policy. Moreover, we find a unique stationary equilibrium when the monetary authority follows an active policy, while multiple stationary equilibria exist when the fiscal authority pursues an active regime. Consequently, such indeterminacy can result in greater volatility in economies in which the fiscal authority is active and the central bank is passive.

Keywords: taxes; inflation; liquidity premium (search for similar items in EconPapers)
JEL-codes: E40 E61 E62 H21 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2020-04
New Economics Papers: this item is included in nep-cba, nep-dge, nep-gen, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:umc:wpaper:2002

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