We analyse the impact of interactions between monetary and fiscal policy on macroeconomic stability. We find that in the presence of sovereign default beliefs a monetary policy, which aims to stabilize inflation through an active interest rate policy, will destabilize the economy if the feedback from debt surprises back to the primary surplus is too weak. This result, which relies on endogenous...

Central to ongoing debates over the desirability of monetary unions is a supposed trade-off, outlined by Mundell [1961]: a monetary union reduces transactions costs but renders stabilization policy less effective. If shocks across countries are sufficiently correlated, then, according to this argument, delegating monetary policy to a single central bank is not very costly and a monetary union i...

We characterize monetary and fiscal policy rules to implement optimal responses to a substantial decline in the natural rate of interest, and compare them with policy decisions made by the Japanese central bank and government in 1999—2004. First, we find that the Bank of Japan’s policy commitment to continuing monetary easing until some prespecified conditions are satisfied lacks history depend...

The fiscal theory of the price level (FTPL) describes fiscal and monetary policy rules such that the price level is determined by government debt and fiscal policy alone, with monetary policy playing at best an indirect role. This theory clashes with the monetarist view that states that money supply is the primary determinant of the price level and inflation. Furthermore, many authors have argu...

This paper examines monetary and fiscal policy through the estimation of a New-Keynesian dynamic general equilibrium model for Iran’s economy. In this New-Keynesian dynamic general equilibrium model, the consumers encounter the liquidity constraint and the firms face sticky prices, while they are changing them. In the model presented, a role is considered for both government spending and taxati...

This session of the conference is titled: “Fiscal Policy in a Monetary Union”. What is a central banker’s role in such a discussion? Well, Mervyn King once said: “Central banks are often accused of being obsessed with inflation. This is untrue. If they are obsessed with anything, it is with fiscal policy.” As so often, Mervyn King was right, we central bankers are indeed obsessed with fiscal po...

A burgeoning part of the monetary policy design literature posits that optimal monetary policy is the solution to a constrained optimization problem where the monetary authority has the discretion to minimize a social welfare function, taking the economy and other policies as given. In their paper “Is Optimal Monetary Policy Always Optimal?” Troy Davig and Refet Gurkaynak (henceforth, DG) argue...