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The dire effects of the lack of monetary and fiscal coordination

Francesco Bianchi and Leonardo Melosi ()

Journal of Monetary Economics, 2019, vol. 104, issue C, 1-22

Abstract: If the government’s willingness to stabilize debt is waning, while the central bank is adamant about keeping inflation low, the economy enters a vicious spiral of higher inflation, monetary tightening, recession, and further debt accumulation. The mere possibility of this conflict represents a drag on the economy. A commitment to inflate away the debt accumulated during a large recession leads to welfare improvements and lower uncertainty by separating long-run fiscal sustainability from the short-run fiscal stimulus. This strategy can be used to avoid the zero lower bound. As a technical contribution, we explain how to build shock-specific policy rules.

Keywords: Monetary and fiscal policies; Coordination; Emergency budget; Markov-switching models; Liquidity traps welfare; Uncertainty (search for similar items in EconPapers)
JEL-codes: E31 E52 E62 E63 D83 (search for similar items in EconPapers)
Date: 2019
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Related works:
Working Paper: The Dire Effects of the Lack of Monetary and Fiscal Coordination (2017) Downloads
Working Paper: The Dire Effects of the Lack of Monetary and Fiscal Coordination (2017) Downloads
Working Paper: The Dire Effects of the Lack of Monetary and Fiscal Coordination (2017) Downloads
Working Paper: The Dire Effects of the Lack of Monetary and Fiscal Coordination (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:104:y:2019:i:c:p:1-22

DOI: 10.1016/j.jmoneco.2018.09.001

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