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: D83 E31 E52 E62 E63 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304393218300564
Full text for ScienceDirect subscribers only

Related works:
Working Paper: The Dire Effects of the Lack of Monetary and Fiscal Coordination (2017)
Working Paper: The Dire Effects of the Lack of Monetary and Fiscal Coordination (2017)
Working Paper: The Dire Effects of the Lack of Monetary and Fiscal Coordination (2017)
Working Paper: The Dire Effects of the Lack of Monetary and Fiscal Coordination (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

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

Access Statistics for this article

Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser

More articles in Journal of Monetary Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().