Working Paper: CEPR ID: DP10586
Authors: Paul Luk; David Vines
Abstract: This paper studies a simple New-Keynesian model of fiscal and monetary policy coordination when the policymaker acts under commitment. With a New Keynesian Phillips curve it is optimal to control inflation only through the use of monetary policy. But, when price-setters use a Steinsson (2003) Phillips curve, fiscal policy plays an active role, enabling a greater degree of consumption smoothing.
Keywords: Fiscal Policy; Monetary Policy; New Keynesian Model; Phillips Curve
JEL Codes: E4; E5; E6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Type of Phillips curve (E31) | Role of fiscal policy (E62) |
| Backward-looking price setters (L11) | Fiscal policy shares burden of inflation control (E62) |
| Fiscal policy (E62) | Aggregate demand (E00) |
| Aggregate demand (E00) | Inflation trajectory (E31) |
| Type of Phillips curve (E31) | Optimal inflation control through monetary policy (E63) |
| Fiscal policy + Monetary policy (E63) | Effective inflation management (E31) |