This paper asks whether an aggressive monetary policy response to inflation is feasible in countries that suffer from fiscal dominance, as long as monetary policy also responds to fiscal variables. We find that if nominal interest rates are allowed to respond to government debt, even aggressive rules that satisfy the Taylor principle can produce unique equilibria. But following such rules resul...

a r t i c l e i n f o This paper studies the monetary policy trade-off between low inflation and low sovereign risk in the environment where fiscal authorities fail to fully ensure the sustainability of government debt. Building on the Fiscal Theory of Price Level (FTPL) and the Fiscal Theory of Sovereign Risk (FTSR), this paper differs in its baseline assumption about the monetary policy objec...

This paper investigates the macroeconomic challenges created by a surge in aid inflows. It develops an analytical framework for examining possible policy responses to increased aid, in terms of absorption and spending of aid—where the central bank controls absorption through monetary policy and the sale of foreign exchange and the fiscal authority controls spending. Different combinations of ab...

In this paper, we study Ramsey-optimal fiscal and monetary policy in a mediumscale model of the U.S. business cycle. The model features a rich array of real and nominal rigidities that have been identified in the recent empirical literature as salient in explaining observed aggregate fluctuations. The main result of the paper is that price stability appears to be a central goal of optimal monet...

Chapter 12 presents the technical analysis of both expansionary/contractionary fiscal/monetary policy or their policy mix in the framework of Keynesian Theory. As you’ll see in Chapter 13, both Fiscal and Monetary Policies are used to target aggregate expenditure (called aggregate demand when price level is allowed to float)so as to change the equilibrium level of income.Remember, all the concl...

This paper extends the two-class monetary growth model by incorporating fiscal activity along the lines of Pasinetti (Cambridge J. Econ. 13, 25–36). Despite this extension, the Cambridge equation is found to be one of long-run equilibria. It is shown that Fiscal policy decreases the accumulation of capital, through an increase in the proportional tax on profits. An inflationary monetary policy ...

We examine global economic dynamics under learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. Under normal monetary and fiscal policy, the intended steady state is locally but not globally stable. Large pessimistic shocks to expectations can lead to deflationary spirals with falling prices and falling output. To avoid this outcome we recommend a...

On using monetary policy for macro-economic regulation, after the 1930s Great Depression when effective demand insufficiency emerges, Keynesianism proposes that proactive fiscal and easy monetary policies shall be introduced. His proposal is later adopted in Roosevelt’s New Deal, which greatly help USA climb out of economy recession and achieve prosperity over 20 years. After sub-prime mortgage...

Based on the hypothesis that rules of monetary and fiscal policy in Brazil may have been subject to different regimes, present study applies Leeper model (1991 2005) identify chronology regimes terms their active passive character. The are estimated using Markov-switching model, with a monthly database from November 2002 December 2015, which endogenously determined. results obtained indicate do...