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The Dire Effects of the Lack of Monetary and Fiscal Coordination

Francesco Bianchi () and Leonardo Melosi ()

No 12164, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: What happens if the government's willingness to stabilize a large stock of debt is waning, while the central bank is adamant about preventing a rise in inflation? The large fiscal imbalance brings about inflationary pressures, triggering a monetary tightening, further debt accumulation, and additional inflationary pressure. Thus, the economy will go through a spiral of higher inflation, output contraction, and further debt accumulation. A coordinated commitment to inflate away the portion of debt resulting from a large recession leads to better macroeconomic outcomes by separating the issue of long-run fiscal sustainability from the need for short-run fiscal stabilization. This strategy can also be used to rule out episodes in which the central bank becomes constrained by the zero lower bound.

Keywords: coordination; emergency budget; liquidity traps.; Markov-switching models; Monetary and Öscal policies (search for similar items in EconPapers)
JEL-codes: D83 E31 E52 E62 E63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2017-07
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Related works:
Journal Article: The dire effects of the lack of monetary and fiscal coordination (2019) 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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