Monetary-Fiscal Interactions: A Reappraisal

George-Marios Angeletos, Chen Lian, Christian Wolf and Dalton Rongxuan Zhang

No 35642, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The possibility of fiscal dominance in the representative-agent New Keynesian model (RANK) hinges on the assumption that income is perpetually demand-determined: fiscal deficits can drive output and inflation within that model only insofar as they trigger infinitely lasting, self-sustained shifts in aggregate spending and income. Moving to heterogeneous-agent New Keynesian models (HANK) opens the door to a different pathway: classical non-Ricardian effects, due to finite horizons or liquidity constraints. A refinement motivated by the model's intended focus on short-run phenomena—requiring a return to flexible-price outcomes in finite time—arrests the infinite feedback loop between spending and income, leaving only the classical non-Ricardian mechanism, and makes sure that the study of monetary-fiscal interactions is not centered on hard-to-test assumptions regarding beliefs at infinity.

JEL-codes: E5 E6 (search for similar items in EconPapers)
Date: 2026-08
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