Monetary and Fiscal Policy Interaction: The Current Consensus Assignment in the Light of Recent Developments

Tatiana Kirsanova, Campbell Leith and Simon Wren‐Lewis
Authors registered in the RePEc Author Service: Simon Wren-Lewis

Economic Journal, 2009, vol. 119, issue 541, F482-F496

Abstract: In the last few years papers have begun to analyse optimal monetary and fiscal policy in models incorporating nominal rigidities where social welfare is derived from the utility of agents. This article examines whether this analysis provides support for the consensus assignment, where monetary policy controls demand and inflation and fiscal policy controls government debt. We argue that the basic structure of New Keynesian models implies that monetary policy dominates fiscal policy as a means of controlling inflation. No similar dominance appears to operate for fiscal policy and debt, if debt has to return to its initial level after shocks.

Date: 2009
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Citations: View citations in EconPapers (51)

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https://doi.org/10.1111/j.1468-0297.2009.02317.x

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