The present paper reassesses the role of monetary conservatism in a setting with nominal government debt and endogenous fiscal policy. We assume that macroeconomic policies are chosen by monetary and fiscal policy makers who interact repeatedly but cannot commit to future actions. The real level of public liabilities is an endogenous state variable, and policies are chosen in a non-cooperative ...

The monetary instrument problem is examined in an endowment economy model with various stochastic disturbances, with minimizing the variance of inflation as the policy objective. Following current developments in the theory of fiscal determination of the price level, for different monetary policies, active or passive fiscal policy is specified to guarantee a unique equilibrium. The responses of...

Pacific Economic Bulletin Volume 21 Number 2 2006 © Asia Pacific Press Granger causality tests confirm the results from the bounds-testing approach of the long-run relationships between Fiji’s economic growth and fiscal and monetary policies and exports. Government expenditure, representing fiscal policy, is assessed to have a greater impact than monetary policy and exports on Fiji’s gross dome...

With integrated trade and financial markets, a sudden collapse in aggregate demand in a large country can cause ‘natural real interest rates’ to fall below zero in other countries, giving rise to a global ‘liquidity trap’. This paper explores the optimal policy response following such a shock, when governments cooperate on both fiscal and monetary policy. Adjusting to a large negative demand sh...

We study optimal fiscal and monetary policy in an environment where explicit frictions give rise to valued money, making money essential in the sense that it expands the set of feasible trades. Our main results are in stark contrast to the prescriptions of earlier flexible-price Ramsey models. The two most important findings that emerge from our work are that the Friedman Rule is typically not ...

This paper focuses on internal and external factors, which influence the inflation rate in developing countries. A monetary model of inflation rate, capable of incorporating both monetary and fiscal policies as well as other internal and external factors, was developed and tested on Iranian data. It was found that, over the long run, a higher exchange rate leads to a higher price and that the f...

We assess empirical evidence and theoretical work on the determinants of the fiscal multiplier. Recent empirical literature suggests that short-run spending multipliers are larger under fixed exchange rate regimes, in economic downturns and during financial crises. However, the evidence on their magnitude under fiscal stress is mixed. Using a stylised model of a small open economy, we carry out...

Since the beginning of 2000s, however, the role of fiscal and monetary policy has started to become more active. Fiscal deficits and public debt levels in EMEs as a whole have declined substantially. Domestic financing has increased, and the share of foreign currency debt has fallen dramatically. And the average public debt maturity has lengthened significantly. What do these developments mean ...

This paper incorporates a distortionary tax into a microfoundations of money framework and revisits the optimum quantity of money. The money constraint in the decentralized market plays a key role in the optimal policy. Only if the constraint is binding can fiscal policy alter the agents’ surplus shares; monetary, but not fiscal, policy affects the agents’ bargaining position, leaving a special...