We reconsider the role of an inflation conservative central banker in a setting with distortionary taxation. To do so, we assume monetary and fiscal policy are decided by independent authorities that do not abide to past commitments. If the two authorities make policy decisions simultaneously, inflation conservatism causes fiscal overspending. But if fiscal policy is determined before monetary ...

This paper examines the effectiveness of fiscal policy in a general equilibrium macromodel with transactions money and an oligopolistic product market. The results suggest that although money may be neutral and play no direct role as policy instrument, its indirect impact on the effectiveness of fiscal policy can be quite substantial. In particular, (i) fiscal policy becomes ineffective as the ...

We find that the consumption risk of investors is lower in states that implement countercyclical fiscal policies. Moreover, firms whose investor base are concentrated in counter-cyclical states have lower stock returns, along with firms that relocate their headquarters to a countercyclical state. Therefore, counter-cyclical fiscal policies lower the consumption risk of investors and consequentl...

This paper analyses the effects of discretionary fiscal policy by presenting new empirical evidence for Germany within a structural vector autoregression (SVAR) framework. Following Blanchard and Perotti (2002), the SVAR model is identified by applying institutional information. We find no compelling evidence for the effectiveness of discretionary fiscal policy. Cutting taxes does not tend to s...

This paper reconsiders the role of separation principles between monetary and fiscal policies which in ‘normal’ times are seen as being conducive to stable outcomes of policymaking. Such principles are discussed for both ordinary nation states (i.e. ‘single economies’, characterized by one monetary and one fiscal policy) and ‘monetary unions’ (characterized by one monetary and many fiscal polic...

This paper proposes a simple OLG model which is consistent with the essential facts about consumer behavior, capital accumulation and wealth distribution, and yields some new and surprising conclusions about fiscal policy. By considering a society in which individuals are distinguished according to two characteristics, altruism and wealth preference, we show that those who in the long run hold ...

This paper investigates the disinflation experiences of three countries, Australia, Canada and New Zealand. Unlike previous approaches which have sought to use institutional data to pre-determine the causes, speed and duration of the transitions to low inflation regimes this paper allows price data itself to determine the speed and timing of the reforms using smooth transition analysis. The res...

The Expansionary Fiscal Contraction (EFC) hypothesis predicts that a major fiscal consolidation leads to an economic expansion under certain circumstances. We test this hypothesis, and the implied non–linear responses of the economy to large and small changes in fiscal policy, using data from the 1983 Danish fiscal reform. We use a structural VAR/event study methodology following Blanchard and ...

How should fiscal policy be conducted in the presence of default risk? We address this question using a sovereign default model with nominal rigidities. An increase in government spending during a recession stimulates economic activity and reduces unemployment. Because the government lacks commitment to future debt repayments, expansionary fiscal policy increases sovereign spreads, making the f...

The countercyclical monetary policy is a policy that economists recommend to adopt in order to slow down the economic fluctuations. The aim of this study is to address the question that, in the presence of fiscal dominance and considering institutional quality (IQL), what the optimal monetary policy should be during the business cycles? To find the appropriate answer, first, in the framework of...