The Dire Effects of the Lack of Monetary and Fiscal Coordination

Francesco Bianchi and Leonardo Melosi

No 23605, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D83 E31 E52 E62 E63 (search for similar items in EconPapers)
Date: 2017-07
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: EFG ME
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Citations: View citations in EconPapers (7)

Published as Francesco Bianchi & Leonardo Melosi, 2018. "The dire effects of the lack of monetary and fiscal coordination," Journal of Monetary Economics, .

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Journal Article: The dire effects of the lack of monetary and fiscal coordination (2019)
Working Paper: The Dire Effects of the Lack of Monetary and Fiscal Coordination (2017)
Working Paper: The Dire Effects of the Lack of Monetary and Fiscal Coordination (2017)
Working Paper: The Dire Effects of the Lack of Monetary and Fiscal Coordination (2017)
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