Fiscal Policy and Optimal Monetary Rules in a non Ricardian Economy

Jean-Pascal Benassy ()

Review of Economic Dynamics, 2003, vol. 6, issue 3, pages 498-512

Abstract: We study in this article how the conduct of fiscal policy interacts with the choice of oprimal monetary rules by a central bank. We consider a non Ricardian model with nondistortionary fiscal policyt, and compare two policy packages, one where fiscal and monetary policy are simultaneously optimized, and one where the monetary policy is optimized under a given fiscal policy. We find a number of results that would not appear in the traditional Ricardian framework: (a) the optimal monetary rule may be activist when fiscal policy is kept constant, whereas it is not when combined with optimal fiscal policy; (b) combining optimally fiscal and monetary policies may lead to far superior outcomes, even when, following Sargent and Wallace (1975), government is allowed to react to much less information. (Copyright: Elsevier)

Keywords: Monetary policy rules; fiscal policy; interest rate rules; optimal policy; nominal rigidities. (search for similar items in EconPapers)
JEL-codes: E52 E63 (search for similar items in EconPapers)
Date: 2003
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