Fiscal Policy and the Monetary Transmission Mechanism

Nicolas Caramp and Dejanir Silva
Additional contact information
Dejanir Silva: Purdue University

Review of Economic Dynamics, 2023, vol. 51, 716-746

Abstract: The economy's response to monetary policy depends on its fiscal backing. We present a novel decomposition of the equilibrium that links the wealth effect, i.e. the revaluation of households' financial and human wealth, to the fiscal response to monetary policy. When monetary policy has fiscal consequences, monetary variables affect the timing of aggregate output while fiscal variables shape its present value and the wealth effect. Consequently, a contractionary monetary policy reduces inflation only if followed by contractionary fiscal policy. The slope of the Phillips curve determines the importance of monetary-fiscal coordination for the effectiveness of monetary policy. (Copyright: Elsevier)

Keywords: Monetary Policy; Fiscal Backing; Monetary-Fiscal Coordination; Wealth Effect (search for similar items in EconPapers)
JEL-codes: E21 E52 E63 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://dx.doi.org/10.1016/j.red.2023.08.001
Access to full texts is restricted to ScienceDirect subscribers and institutional members. See https://www.sciencedirect.com/ for details.

Related works:
Software Item: Code and data files for "Fiscal Policy and the Monetary Transmission Mechanism" (2023)
Working Paper: Fiscal Policy and the Monetary Transmission Mechanism (2020)
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:red:issued:22-92

Ordering information: This journal article can be ordered from
https://www.economic ... ription-information/

DOI: 10.1016/j.red.2023.08.001

Access Statistics for this article

Review of Economic Dynamics is currently edited by Loukas Karabarbounis

More articles in Review of Economic Dynamics from Elsevier for the Society for Economic Dynamics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().