Cheap Talk in a New Keynesian Model

Dennis Wesselbaum

No 1604, Working Papers from University of Otago, Department of Economics

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 (search for similar items in EconPapers)
JEL-codes: C32 C7 E5 E6 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2016-02, Revised 2016-02
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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http://www.otago.ac.nz/economics/otago557004.pdf First version, 2016 (application/pdf)

Related works:
Journal Article: Cheap Talk in a New Keynesian Model (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:otg:wpaper:1604

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