Cheap Talk in a New Keynesian Model

Dennis Wesselbaum

Journal of Quantitative Economics, 2022, vol. 20, issue 3, No 7, 691 pages

Abstract: Abstract This paper shows that the stance of fiscal policy does have significant impact on the conduct of monetary policy in the United States. Further, we document that the implied fiscal-monetary policy interactions are subject to regime instability, using a Markov-switching model. Then, we develop a microfoundation of regime switches using a cheap talk game between central bank and government. As a case study, we simulate the effects of regime switches within an otherwise standard New Keynesian model using the cheap talk game in the state-space of our model.

Keywords: Markov-switching; Monetary and Fiscal policy interactions; Policy coordination games; Sequential games; C32; C7; E5; E6 (search for similar items in EconPapers)
Date: 2022
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Working Paper: Cheap Talk in a New Keynesian Model (2016)
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DOI: 10.1007/s40953-022-00299-7

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