On the Joint Determination of Policy and Monetary Policy

Fernando M. Martin ()

Discussion Papers from Department of Economics, Simon Fraser University

Abstract: In the absence of government commitment, the conduct of fiscal and monetary policy depends on the sign of inherited net nominal government obligations. When these obligations are negative, monetary policy is non-distortionary and fiscal policy distortions are smoothed over time, either forever or for a finite number of periods, depending on the initial state. For positive net nominal government obligations, both fiscal and monetary policies are distortionary, and there exists a unique and stable steady state. At this steady state, a reform endowing the government with a commitment technology has no effect on policy. For any level of initial debt, the estimated welfare loss due to lack of government commitment is small.

Keywords: money; inflation; government debt; time-consistency; lack of commitment (search for similar items in EconPapers)
JEL-codes: E13 E52 E62 E63 (search for similar items in EconPapers)
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