Government policy in monetary economies

Fernando Martin

No 2011-026, Working Papers from Federal Reserve Bank of St. Louis

Abstract: I study how the general and specific details of a micro founded monetary framework affect the determination of policy when the government has limited commitment. The conduct of policy depends on the interaction between the incentive to smooth distortions intertemporally and a time-consistency problem. In equilibrium, fiscal and monetary policies are distortionary, but long-run policy is not afflicted by time-consistency problems. Policy variables in specific applications of the general framework react similarly to variations in fundamentals. Nevertheless, resolving certain environment frictions affect long-run policy significantly. The response of government policy to aggregate shocks is qualitatively similar across the studied model variants. However, there are significant quantitative differences in the response of government policy to productivity shocks, mainly due to the idiosyncratic behavior of the money demand. Environments with no trading frictions display the best fit to post-war U.S. data.

Keywords: Economic; policy (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: GOVERNMENT POLICY IN MONETARY ECONOMIES (2013)
Working Paper: Government Policy in Monetary Economies (2010)
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DOI: 10.20955/wp.2011.026

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